ETF premium - should I sell and switch?

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ETF premium - should I sell and switch?

Postby boggler » Fri May 10, 2013 3:31 pm

The ETF premium on VT right now is $0.24. I bought around $150k of it on Wednesday before I saw the premium existed. If I sell it to undo the ETF purchase right before the market close and immediately purchase the mutual fund, I can then do an ETF conversion, which amounts to a $360 decrease in my cost. Seems worth it, no? What am I missing?

I really don't want to be dealing with this, but I have a hard time giving up a low-risk savings of over three hundred dollars.
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Re: ETF premium - should I sell and switch?

Postby livesoft » Fri May 10, 2013 3:34 pm

I'd wait until the premium was up to at least 0.50% before I did this. That way, I would make more than $300.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: ETF premium - should I sell and switch?

Postby Epsilon Delta » Fri May 10, 2013 3:53 pm

livesoft wrote:I'd wait until the premium was up to at least 0.50% before I did this. That way, I would make more than $300.

Why wait? He can make his $300 today and if the premium is still higher than the spread he can do it again tomorrow. I'd guess that Vanguard would frown on this practice, but I can't see anything that explicitly prevents doing this serially.
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Re: ETF premium - should I sell and switch?

Postby boggler » Fri May 10, 2013 6:28 pm

Epsilon Delta wrote:
livesoft wrote:I'd wait until the premium was up to at least 0.50% before I did this. That way, I would make more than $300.

Why wait? He can make his $300 today and if the premium is still higher than the spread he can do it again tomorrow. I'd guess that Vanguard would frown on this practice, but I can't see anything that explicitly prevents doing this serially.


Yeah - it's a little odd that this "opportunity" exists in the first place. I wish it didn't, frankly, as then I'd get a fair price whether I bought the ETF or the mutual fund.
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Re: ETF premium - should I sell and switch?

Postby grabiner » Fri May 10, 2013 10:29 pm

The premium/discount on a fund which holds foreign stocks is not reliable, because the actual price of those foreign stocks is not known. In order to calculate the net asset value of Japanese stocks, you have to estimate what they are worth when the Japanese market is closed, and use that to calculate the premium/discount. If the ETF is trading at a premium relative to that estimate, this means that investors expect the foreign stocks to be worth more than the quoted NAV when the market next opens; if not, they could arbitrage (for example, by selling VT and buying VTI and VXUS to keep the same allocation).
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