March 14, 2012 at 07:00 AM EDT
Three ETFs Trading At A Huge Premium To NAV (And Three Alternatives)
Though ETFs may appear as very simple and straightforward investment vehicles, there is a rather complex infrastructure that lies beneath the surface. Under the hood of exchange-traded products is a unique “creation / redemption” mechanism that allows for the number of shares outstanding to fluctuate based on supply and demand. Generally, this mechanism serves a very useful and practical purpose: it keeps the prices of ETFs in line with the value of the underlying securities [see 25 Things Every Financial Advisor Should Know About ETFs]. When the value of an ETF climbs above its NAV, new shares can be created from the components and sold at an arbitrage profit (and vice versa). The efficiency of the creation / redemption mechanisms allows those transactions to be executed almost immediately, thereby creating a powerful incentive for opportunistic institutions to turn a profit by keeping ETF prices in line with their NAVs. This [...] Click here to read the original article on ETFdb.com. Related Posts: Ten Unexpected Observations On YTD ETF Returns Six Noteworthy ETF Innovations ProShares Debuts Geared Natural Gas ETFs New VIX ETFs Hit The Market ETF Price Cuts: NAGS, EPI Slash Fees
Though ETFs may appear as very simple and straightforward investment vehicles, there is a rather complex infrastructure that lies beneath the surface. Under the hood of exchange-traded products is a unique “creation / redemption” mechanism that allows for the number of shares outstanding to fluctuate based on supply and demand. Generally, this mechanism serves a very useful and practical purpose: it keeps the prices of ETFs in line with the value of the underlying securities [see 25 Things Every Financial Advisor Should Know About ETFs]. When the value of an ETF climbs above its NAV, new shares can be created from the components and sold at an arbitrage profit (and vice versa). The efficiency of the creation / redemption mechanisms allows those transactions to be executed almost immediately, thereby creating a powerful incentive for opportunistic institutions to turn a profit by keeping ETF prices in line with their NAVs. This [...]

Click here to read the original article on ETFdb.com.

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