7/11/2013 5:45 PM ET|
A hidden danger in ETFs
In fast-moving markets, the price of your exchange-traded fund may disconnect from the price of the assets it holds.
Investors who buy and sell exchange-traded funds are learning that they don't always get what they pay for. Sharp price swings and heavy selling can cause the prices of ETFs to vary from the value of the assets they own.
That's been especially clear of late in bond ETFs, as Bloomberg's Lisa Abramowicz and Mary Childs explain.
ETFs, you'll recall, hold baskets of underlying securities and trade throughout the day like a stock. Most track an index and stray little from their net-asset value, or NAV. But heavy trading and market volatility can compromise that consistency.
Last month, as trading in the three biggest credit ETFs approached record levels amid the market's biggest losses since 2008, the ETFs' shares dropped as much as 1.1 percentage point more than the net value of the securities they hold.
Since May 8, the two largest high-yield bond ETFs have lost about 6% -- 2 percentage points more than the loss for the Bank of America Merrill Lynch U.S. High Yield Index that they're supposed to track.
Shares of BlackRock's (BLK) popular $13.7 billion iShares iBoxx $ High Yield Corporate Bond ETF (HYG) fell 4.3% in the six days ended June 24, while the net value of its assets dropped 3%, according to data compiled by Bloomberg.
Meanwhile, BlackRock's investment-grade bond fund has lost 7.3% since the end of April, compared with a 5.9% decline on the Bank of America Merrill Lynch U.S. Corporate Index. State Street's (STT) $9.1 billion junk-bond ETF has lost 5.2% since the end of April -- 2 percentage points more than the Bank of America Merrill Lynch U.S. High Yield Index.
Last week, Bloomberg News's Christopher Condon and Margaret Collins wrote about how share prices for dozens of ETFs -- especially foreign and less liquid ones -- hit their biggest discounts in a year against their net-asset values during the global stock and bond selloff.
Case in point: In just nine trading days through June 25, the $362 million iShares MSCI Philippines Investable Market Index Fund ($EPHE) swung from a 4.7% premium to a 6.1% discount, before returning to a 2% premium. Nuveen's S&P High Yield Municipal Bond (NHMAX) exchange-traded fund hit a discount of 4.8% to its assets last month, the highest in more than a year.
The lesson: In fast-moving markets, the price of your exchange-traded fund may disconnect from the price of the assets it holds.
More from Bloomberg Businessweek
VIDEO ON MSN MONEY
Gee, let me guess who collects the spread between the ETF price and the value of it's underlying shares.
These markets are so broken and corrupt it's enough to make someone want to pay off the mortgage on their underwater home instead.
Thanks again Wall Street.
Like I taught the kids, when somebody says "watch this", step back and look out.
The 1% will always win, they pay 15% or like Romney 12% on their income regardless of how many billions that is, people like Romney can twist the rules so they can hoard up to 200 million in their 401ks while real Americans by law can only put around 25k a year in theirs, all that 401k and home equity money that was harvested in 2007-2009 during the Bush and Republican ( regulation costs jobs lets de-regulate everything ) era has now been built up again and will soon be ready for harvesting.
The Republicans forced poor Bill the cigar lover to sign their bill repealing the glass-seagal act and it has been open season on the middle class since then. I have been interviewing for jobs in engineering since I will graduate in May on next year, almost 80% of the engineers I see in those offices are H1B visa types from China and India. The Republicans are currently trying to pass a bill removing all caps on H1B visa candidates allowed in this country. Gota love that Republican cheap labor, they love to shaft the middle class.
My dad says de-regulation is the Republican code word for wealth redistribution from the middle class to the 1%.
ETF's are designed to go to zero. Many have gotten close and have been reverse split to keep it alive, while eating up the investment capital of those that did not really understand what the ETF's does. Adding insult to injury, these holders of exchange trade funds pay management fees to the company that runs the ETF; example Schwab. Best of luck to us all.
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