ETFs at Discount to NAV: Anyone Freaking Out?

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Frank2012
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ETFs at Discount to NAV: Anyone Freaking Out?

Post by Frank2012 » Sat Mar 14, 2020 1:44 pm

For those investing in ETFs, does it freak you out that an ETF can trade at a discount to Net Asset Value (NAV)?

So your ETF may be worth less than the value of the actual stocks/bonds in the ETF. At least with a mutual fund, the value of the fund reflects the assets in the fund.

Fidelity has some good info on this:

https://www.fidelity.com/learning-cente ... ounts-etfs

I'm trying to understand why take the risk on VTI when you can just use VTSAX and not have to worry about the value of your fund being less than NAV....

drk
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by drk » Sat Mar 14, 2020 1:50 pm

An ETF premium (discount) is only an issue if you're buying (selling) the fund. Otherwise, it doesn't matter at all.

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Nate79
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by Nate79 » Sat Mar 14, 2020 1:57 pm

No not freaking out. Which number do you believe to be more correct. The NAV calculated by some accountants at the mutual fund company or the ETF price as determined by the entire market?

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Frank2012
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by Frank2012 » Sat Mar 14, 2020 2:09 pm

Nate79 wrote:
Sat Mar 14, 2020 1:57 pm
No not freaking out. Which number do you believe to be more correct. The NAV calculated by some accountants at the mutual fund company or the ETF price as determined by the entire market?
I guess I would trust the accountants over panicky investors (or hedge fund managers) dumping ETF shares and causing a massive discount to NAV for the ETF.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alluringreality » Sat Mar 14, 2020 2:16 pm

As a mutual fund investor, the primary selling point I see for ETFs is a lower expense ratio. By the time I account for premiums, discounts, and spreads I tend to question if I would actually save any significant expenses by buying ETFs, so I've just stuck with the convenience of mutual funds for end of day NAV pricing and automatic purchases. This past week it looks like people selling certain bond ETFs to rebalance and buy stock ETFs may have been getting a raw deal compared to doing the same with mutual funds. Buying certain ETFs at recent discounts seems reasonable, but it also means sellers may have done better getting NAV for mutual funds than market price for ETFs.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by senex » Sat Mar 14, 2020 5:18 pm

Frank2012 wrote:
Sat Mar 14, 2020 2:09 pm
I guess I would trust the accountants over panicky investors (or hedge fund managers) dumping ETF shares and causing a massive discount to NAV for the ETF.
Right answer. An accountant misstating nav can be fined or go to jail.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by HEDGEFUNDIE » Sat Mar 14, 2020 5:23 pm

senex wrote:
Sat Mar 14, 2020 5:18 pm
Frank2012 wrote:
Sat Mar 14, 2020 2:09 pm
I guess I would trust the accountants over panicky investors (or hedge fund managers) dumping ETF shares and causing a massive discount to NAV for the ETF.
Right answer. An accountant misstating nav can be fined or go to jail.
Wrong answer.

When was the last time a company was ever bought or sold for book value?

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Eric
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by Eric » Sat Mar 14, 2020 5:43 pm

HEDGEFUNDIE wrote:
Sat Mar 14, 2020 5:23 pm
When was the last time a company was ever bought or sold for book value?
Book value isn't accurate for most companies, because (1) the underlying asset values may be stale and (2) it doesn't account for "going concern" or management value. Are either of those issues for a mutual fund or ETF that passively holds only publicly traded stock in mostly large-cap companies?

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by HEDGEFUNDIE » Sat Mar 14, 2020 5:45 pm

Eric wrote:
Sat Mar 14, 2020 5:43 pm
HEDGEFUNDIE wrote:
Sat Mar 14, 2020 5:23 pm
When was the last time a company was ever bought or sold for book value?
Book value isn't accurate for most companies, because (1) the underlying asset values may be stale and (2) it doesn't account for "going concern" or management value. Are either of those issues for a mutual fund or ETF that passively holds only publicly traded stock in mostly large-cap companies?
ETFs are built to be liquid while the underlying holdings may not be. Why then the assumption that the two things should be equal in value?

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by Eric » Sat Mar 14, 2020 5:49 pm

HEDGEFUNDIE wrote:
Sat Mar 14, 2020 5:45 pm
ETFs are built to be liquid while they underlying holdings may not be. Why the assumption that the two things should be equal in value?
I just would not have expected VTI to be more liquid than its underlying holdings, considering that those holdings are mostly actively-traded large-cap stocks.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by HEDGEFUNDIE » Sat Mar 14, 2020 5:52 pm

Eric wrote:
Sat Mar 14, 2020 5:49 pm
HEDGEFUNDIE wrote:
Sat Mar 14, 2020 5:45 pm
ETFs are built to be liquid while they underlying holdings may not be. Why the assumption that the two things should be equal in value?
I just would not have expected VTI to be more liquid than its underlying holdings, considering that those holdings are mostly actively-traded large-cap stocks.
With the massive shift of retail money into index funds, that is exactly what you should expect.
Last edited by HEDGEFUNDIE on Sat Mar 14, 2020 6:10 pm, edited 1 time in total.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by Nate79 » Sat Mar 14, 2020 6:00 pm

Frank2012 wrote:
Sat Mar 14, 2020 2:09 pm
Nate79 wrote:
Sat Mar 14, 2020 1:57 pm
No not freaking out. Which number do you believe to be more correct. The NAV calculated by some accountants at the mutual fund company or the ETF price as determined by the entire market?
I guess I would trust the accountants over panicky investors (or hedge fund managers) dumping ETF shares and causing a massive discount to NAV for the ETF.
I will point you to this post by Alex, who actually did this for a living explaining why your answer, the common opinion, may be wrong.

viewtopic.php?f=10&t=305626&p=5094248#p5094248

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by senex » Wed Mar 18, 2020 1:41 pm

HEDGEFUNDIE wrote:
Sat Mar 14, 2020 5:23 pm
When was the last time a company was ever bought or sold for book value?
I regularly buy VTSAX for its book value.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Wed Mar 18, 2020 1:52 pm

Former mutual fund accountant here. You have this backwards. ETFs prices are generally more accurate than a mutual fund's NAV.

You construct a fund's NAV by figuring out what the fund assets are (easy) and what the price of each asset is. In a fast moving market the quality of price data takes a real hit. If you have old moldy suspect data what is one to do? You take that suspect data and dump it into your pricing model and turn the crank to get a NAV.

To be blunt, there are problems with both ETF and NAV pricing. In normal times it does not matter much. NAVs give the false impression of precision that they don't have.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by MotoTrojan » Wed Mar 18, 2020 1:56 pm

senex wrote:
Wed Mar 18, 2020 1:41 pm
HEDGEFUNDIE wrote:
Sat Mar 14, 2020 5:23 pm
When was the last time a company was ever bought or sold for book value?
I regularly buy VTSAX for its book value.
You and I have a different definition of book value.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by JoMoney » Wed Mar 18, 2020 2:17 pm

MotoTrojan wrote:
Wed Mar 18, 2020 1:56 pm
senex wrote:
Wed Mar 18, 2020 1:41 pm
HEDGEFUNDIE wrote:
Sat Mar 14, 2020 5:23 pm
When was the last time a company was ever bought or sold for book value?
I regularly buy VTSAX for its book value.
You and I have a different definition of book value.
If it's an "open ended" fund, the shares of that Registered Investment Company (a.k.a. "mutual fund") always trade at book value, and the assets are marked to market.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

alex_686
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Wed Mar 18, 2020 2:18 pm

senex wrote:
Wed Mar 18, 2020 1:41 pm
HEDGEFUNDIE wrote:
Sat Mar 14, 2020 5:23 pm
When was the last time a company was ever bought or sold for book value?
I regularly buy VTSAX for its book value.
“How do you do that?”, says the former mutual fund accountant- wondering how you are buying at a 50% discount (ballpark) to the NAV.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Wed Mar 18, 2020 2:21 pm

JoMoney wrote:
Wed Mar 18, 2020 2:17 pm
If it's an "open ended" fund, the shares of that Registered Investment Company (a.k.a. "mutual fund") always trade at book value, and the assets are marked to market.
Almost never. “Book value” refers to the purchase price of the underlying assets. You mean NAV.

You are also assuming that there are good marks (i.e. pricing data) to mark your assets. In times like these that is a poor assumptions.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by senex » Wed Mar 18, 2020 2:36 pm

alex_686 wrote:
Wed Mar 18, 2020 2:18 pm
senex wrote:
Wed Mar 18, 2020 1:41 pm
I regularly buy VTSAX for its book value.
“How do you do that?”, says the former mutual fund accountant- wondering how you are buying at a 50% discount (ballpark) to the NAV.
I thought FAS 115 required publicly-traded securities to be carried at fair market value.
Not an accountant, though. Could you explain how VTSAX calculates its book value?

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by rascott » Wed Mar 18, 2020 2:38 pm

alex_686 wrote:
Wed Mar 18, 2020 1:52 pm
Former mutual fund accountant here. You have this backwards. ETFs prices are generally more accurate than a mutual fund's NAV.

You construct a fund's NAV by figuring out what the fund assets are (easy) and what the price of each asset is. In a fast moving market the quality of price data takes a real hit. If you have old moldy suspect data what is one to do? You take that suspect data and dump it into your pricing model and turn the crank to get a NAV.

To be blunt, there are problems with both ETF and NAV pricing. In normal times it does not matter much. NAVs give the false impression of precision that they don't have.

Thank you.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Wed Mar 18, 2020 4:23 pm

senex wrote:
Wed Mar 18, 2020 2:36 pm
alex_686 wrote:
Wed Mar 18, 2020 2:18 pm
senex wrote:
Wed Mar 18, 2020 1:41 pm
I regularly buy VTSAX for its book value.
“How do you do that?”, says the former mutual fund accountant- wondering how you are buying at a 50% discount (ballpark) to the NAV.
I thought FAS 115 required publicly-traded securities to be carried at fair market value.
Not an accountant, though. Could you explain how VTSAX calculates its book value?
We may be talking past each other. Maybe.

In my mind, you purchased a security. That purchase price flowed to the "Book" values. That is, cost basis. As the price changes in values, that charges would flow to the unrealized (long/short) term (gain/loss) accounts. I will say that is how the accounts were labeled.

Are you thinking about mark-to-book verse mark-to-market? Because yes, FAS 115 did mostly kill off the mark-to-book pricing method. NAV is definitely based on mark-to-market values, even if those marks are suspect.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by Dottie57 » Wed Mar 18, 2020 4:30 pm

No it does not freak me out since I knew that this was a possibility. When trading you work with market price at time of trade not the NAV. If you want NAV pricing you use a mutual fund.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by mrspock » Wed Mar 18, 2020 4:32 pm

About 15% of my bonds are ETF based (VTEB - Intermediate National Muni, which got crushed today), the rest are mutual funds (VCAIX - Cali Intermediate Munis, VWITX - National Intermediate Munis). Sufficed to say... my little ETF bond adventure will come to an end at the end of this recovery :) , overall I'm a bit disappointed, but in fairness this happened in 2008 as well. Need to take the good with the bad. What will be a bit painful is when it comes time to rebalance, my plan right now is to sell the mutual fund munis and rebalance back into them as the rebalance bands hit again on the way up.

A shining star in all this: none other than VCAIX, it's holding up surprisingly well through all this. I won't speculate as to why, as I'm sure there are a number of factors (credit risk, yields, demand etc).

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by mrspock » Wed Mar 18, 2020 4:39 pm

alex_686 wrote:
Wed Mar 18, 2020 1:52 pm
Former mutual fund accountant here. You have this backwards. ETFs prices are generally more accurate than a mutual fund's NAV.

You construct a fund's NAV by figuring out what the fund assets are (easy) and what the price of each asset is. In a fast moving market the quality of price data takes a real hit. If you have old moldy suspect data what is one to do? You take that suspect data and dump it into your pricing model and turn the crank to get a NAV.

To be blunt, there are problems with both ETF and NAV pricing. In normal times it does not matter much. NAVs give the false impression of precision that they don't have.
This assumes "Mr. Market" can accurately price anything right now. Right now he's a blind folded, drunken, scared, rambling dimwit lurching around the house breaking grandma's nice vases, I wouldn't trust him to set prices at a lemonade stand, let-alone Muni bonds. Were there actual earnings numbers, GDP data, employment or gov't revenue data, then he could do his job and factor it all into a reasonable guess as to asset prices. Right now, pure guessing and speculation. I trust the NAV over the market any day right now, to be sure it's inaccurate.... but far less so.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Wed Mar 18, 2020 4:55 pm

mrspock wrote:
Wed Mar 18, 2020 4:39 pm
[I trust the NAV over the market any day right now, to be sure it's inaccurate.... but far less so.
So, NAV is based on market prices. Often from a few days ago. So not just drunk, but 3 days behind. So let me tell you a story.

Working as a mutual fund accountant in 2008. We had a slab of MBS that we were pricing at 100 because that was what the market was pricing them. Life is good. Then the financial crisis happened and the MBS market froze up and there were no trades. Our models said they were worth around 80. There were similar MBS - but not the exact ones - that were trading around 60. We priced them at 100. When you mark-to-market you kind of have to go off the last trade. And if the last trade was 100 from 3 days ago that is what you mark them too.

In retrospect, ETFs were doing a much better job of delivering the correct price back in 2008. For today - I honestly don't know. I am out of that world and doing something else. There are problems with the ETF creation/redemption process during times of stress. The are liquidity problems with ETFs, but in 2008 the underlying assets tended to have even more problems. I could go on. But direct experience tells me that ETFs are probably kicking out higher quality price quality than NAVs.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by senex » Wed Mar 18, 2020 5:00 pm

alex_686 wrote:
Wed Mar 18, 2020 4:23 pm
In my mind, you purchased a security. That purchase price flowed to the "Book" values. That is, cost basis. As the price changes in values, that charges would flow to the unrealized (long/short) term (gain/loss) accounts. I will say that is how the accounts were labeled.

Are you thinking about mark-to-book verse mark-to-market? Because yes, FAS 115 did mostly kill off the mark-to-book pricing method. NAV is definitely based on mark-to-market values, even if those marks are suspect.
Appreciate your willingness to explain. I don't know the accounting terminology.

My naive understanding is that if I form a corporation, Corp ABC, that owns nothing except 100 shares of MSFT that I bought years ago for $10/share (currently worth $140/share), and I publish consolidated financial statements, that my balance sheet will say

Total Assets: $14,000
marketable securities -- $14,000
Total Liabilities: $0

And thus book value (assets - liabilities) will be $14k. (notably, not $1k).
If wrong, I would appreciate more info on which line(s) are wrong. Thanks

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by whodidntante » Wed Mar 18, 2020 5:03 pm

Normally not an issue. NAV is only an estimate in many cases. If things get too far out of whack, some enterprising market participant will right the ship, because it's profitable to do so.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by vineviz » Wed Mar 18, 2020 5:09 pm

From Dave Nadig:
Bond ETFs are not failing some test, bond pricing services are. NAVs (for ETFs and MFs) are only loosely based on reality on the best day, and these are not good days. My latest here ->
https://www.etftrends.com/bond-etfs-not ... ual-funds/
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Wed Mar 18, 2020 5:20 pm

senex wrote:
Wed Mar 18, 2020 5:00 pm
Appreciate your willingness to explain. I don't know the accounting terminology.

My naive understanding is that if I form a corporation, Corp ABC, that owns nothing except 100 shares of MSFT that I bought years ago for $10/share (currently worth $140/share), and I publish consolidated financial statements, that my balance sheet will say

Total Assets: $14,000
marketable securities -- $14,000
Total Liabilities: $0

And thus book value (assets - liabilities) will be $14k. (notably, not $1k).
If wrong, I would appreciate more info on which line(s) are wrong. Thanks
We might be getting deep into the woods here. And it has been a while since I have done this and they keep changing the rules. To illustrate, you can read Warren Buffets annual reports over the past 5 years as he changes his mind multiple times on

So let say your example is Year 1.

Now, lets move to Year 2 where we have:

Total Assets: $20,000
marketable securities -- $20,000
Total Liabilities: $0

Now, why was there a change? Is it because MSFT increased from $140 to $200. Trading profits? Maybe MSFT went down to $100 and the company loaded up more MSFT.

Different industries can chose different methods on how to report this. Each method uses a different income recognition method. For mutual funds it would probably looks something like this:

Total Assets: $20,000
marketable securities
Purchase Price (aka book) $14,000
Unrealized Gains: $6,000
Total Liabilities: $0

You want to know what the unrealized gains are so you know what the protentional end of year capital-gains distribution might be like.

Now, other industries where the marketable securities are a minor part will look different - probably a lot closer to your example.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Wed Mar 18, 2020 5:26 pm

vineviz wrote:
Wed Mar 18, 2020 5:09 pm
From Dave Nadig:
Bond ETFs are not failing some test, bond pricing services are. NAVs (for ETFs and MFs) are only loosely based on reality on the best day, and these are not good days. My latest here ->
https://www.etftrends.com/bond-etfs-not ... ual-funds/
Vineviz, thanks for the article. It was a good read and put some things better than I could. I have a little nit in that I don't think it is the bond pricing services that are failing. As the article notes, the market is fractured and illiquid, price quality is going to be second rate. It does not how good the bond pricing services is, you can't make a silk purse out of a sow's ear.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by txaggie » Thu Mar 19, 2020 12:22 am

I was surprised to see Vanguard Tax-Exempt Bond close at a large discount to NAV today. The ETF (VTEB) fell 5.85% while the mutual fund (VTEAX) fell 0.95%.

I placed an order to exchange intermediate term tax exempt mutual fund shares for total stock market mutual fund shares this afternoon. I was looking at the price of VTEB and saw that it was down almost 7% as I entered the order. I assumed the bond mutual fund that I was exchanging from was also having a really bad day. When the mutual fund fell less than 1% I was really surprised.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by sjwoo » Thu Mar 19, 2020 6:03 am

I'm a little confused...regarding FLOT, the iShares Floating Rate Bond ETF (https://www.ishares.com/us/products/239 ... e-bond-etf):

NAV as of Mar 18, 2020
$49.56
52 WK: 49.56 - 51.06

1 Day NAV Change as of Mar 18, 2020
-0.08 (-0.15%)

But yesterday it closed at $44.45, down $−2.83 (5.99%). If the NAV is still almost $50 but the market price is $45, does that mean if I wait out the volatility, the ETF will magically go back to the NAV? Or is the NAV just lagging the real value of this ETF because of the intense selling?

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Thu Mar 19, 2020 6:26 am

sjwoo wrote:
Thu Mar 19, 2020 6:03 am
I'm a little confused...regarding FLOT, the iShares Floating Rate Bond ETF (https://www.ishares.com/us/products/239 ... e-bond-etf):

NAV as of Mar 18, 2020
$49.56
52 WK: 49.56 - 51.06

1 Day NAV Change as of Mar 18, 2020
-0.08 (-0.15%)

But yesterday it closed at $44.45, down $−2.83 (5.99%). If the NAV is still almost $50 but the market price is $45, does that mean if I wait out the volatility, the ETF will magically go back to the NAV? Or is the NAV just lagging the real value of this ETF because of the intense selling?
The NAV probably is artificially high. During times of stress liquidity is low. i.e. no trading. No trading means no new prices. Which means that the fund accountants have to input stale price data into their system. I was a former fund accountant and this is what happened in 2008.

It is also the case that extreme selling can push the ETF prices below NAV, but I would guess that was a minor effect.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by dukeblue219 » Thu Mar 19, 2020 6:35 am

One thing I've noticed around here is an extreme reverence for NAV as Fact. An example would be investors switching from a MF to ETF; I've seen more than one poster advocate placing limit orders on the ETF "at NAV" as if NAV isn't instantly out of date the moment its computed.

Crises like this one will mess up liquidity. I think we just need to accept that, but if I need to pick one I'm going to assume the ETF is accurate simply because the market says it is.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by MotoTrojan » Thu Mar 19, 2020 6:41 am

dukeblue219 wrote:
Thu Mar 19, 2020 6:35 am
One thing I've noticed around here is an extreme reverence for NAV as Fact. An example would be investors switching from a MF to ETF; I've seen more than one poster advocate placing limit orders on the ETF "at NAV" as if NAV isn't instantly out of date the moment its computed.

Crises like this one will mess up liquidity. I think we just need to accept that, but if I need to pick one I'm going to assume the ETF is accurate simply because the market says it is.
I can agree with this logic but it still raises an eyebrow when two massive S&P500 ETFs (say VOO & SPY) are more than 1% off intra-day. If they can't agree on a price to within 10bp on the most liquid equity index in the world, I don't know how you can say what is most trustworthy.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by Alchemist » Thu Mar 19, 2020 6:50 am

I think that Bond and Stock ETFs should be viewed differently here. In both 2008 and now 2020, Bond ETFs have departed significantly from NAV and introduced a lot of volatility that people buying bond funds probably did not intend/want their bond funds to have. Most people are better off with a bond mutual fund as opposed to ETF.

Stock ETFs however I think are fine and they come with advantages over their MF peers. Tax efficiency is the big win for ETFs over non-vanguard MFs. Additionally limit orders can be quite profitable. I had a limit order in for ITOT yesterday at $51 per share. It opened and closed above that price level but reached it intraday. My limit order executed and I got a few percent discount on those shares. My FSKAX order filled at Nav at the end of the day. Finally, Stock ETFs tend to track NAV much better than Bond ETFs even during this volitility. Any crazy Bid/Ask spreads can be mitigated with Limit Orders.

With that said, I use Stock ETFs in my taxable and Stock MFs in my Roth accounts. I like the MF simplicity but the ETF tax advantage is too large to ignore for my taxable account.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by dukeblue219 » Thu Mar 19, 2020 6:52 am

MotoTrojan wrote:
Thu Mar 19, 2020 6:41 am

I can agree with this logic but it still raises an eyebrow when two massive S&P500 ETFs (say VOO & SPY) are more than 1% off intra-day. If they can't agree on a price to within 10bp on the most liquid equity index in the world, I don't know how you can say what is most trustworthy.
So THAT I have actually been more interested in. I accept that bonds and bond funds are less liquid, and that fund/etf performance might look off, but those massive equity ETFs should (intuitively) run together. I'd be curious to see an analysis on it. I mean, neither one actually holds the exact breakdown of 500 stocks. Is it a sampling bias? Somehow I doubt it.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Thu Mar 19, 2020 6:55 am

MotoTrojan wrote:
Thu Mar 19, 2020 6:41 am
I can agree with this logic but it still raises an eyebrow when two massive S&P500 ETFs (say VOO & SPY) are more than 1% off intra-day. If they can't agree on a price to within 10bp on the most liquid equity index in the world, I don't know how you can say what is most trustworthy.
How confident are you with this statement. They do compute their NAVs slightly differently. SPY does not reinvest their dividends. SPY has better arbitrage opportunities since they have listed options. They could be publishing their NAVs at slightly different times. etc.
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by MotoTrojan » Thu Mar 19, 2020 7:17 am

alex_686 wrote:
Thu Mar 19, 2020 6:55 am
MotoTrojan wrote:
Thu Mar 19, 2020 6:41 am
I can agree with this logic but it still raises an eyebrow when two massive S&P500 ETFs (say VOO & SPY) are more than 1% off intra-day. If they can't agree on a price to within 10bp on the most liquid equity index in the world, I don't know how you can say what is most trustworthy.
How confident are you with this statement. They do compute their NAVs slightly differently. SPY does not reinvest their dividends. SPY has better arbitrage opportunities since they have listed options. They could be publishing their NAVs at slightly different times. etc.
I am not highly confident in my statement.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by sjwoo » Thu Mar 19, 2020 7:18 am

Alchemist wrote:
Thu Mar 19, 2020 6:50 am
I think that Bond and Stock ETFs should be viewed differently here. In both 2008 and now 2020, Bond ETFs have departed significantly from NAV and introduced a lot of volatility that people buying bond funds probably did not intend/want their bond funds to have. Most people are better off with a bond mutual fund as opposed to ETF.
You said it. This is my biggest takeaway from this crisis, that emergency funds should definitely not be in these types of ETFs.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by grayfox » Thu Mar 19, 2020 7:28 am

alex_686 wrote:
Wed Mar 18, 2020 5:26 pm
vineviz wrote:
Wed Mar 18, 2020 5:09 pm
From Dave Nadig:
Bond ETFs are not failing some test, bond pricing services are. NAVs (for ETFs and MFs) are only loosely based on reality on the best day, and these are not good days. My latest here ->
https://www.etftrends.com/bond-etfs-not ... ual-funds/
Vineviz, thanks for the article. It was a good read and put some things better than I could. I have a little nit in that I don't think it is the bond pricing services that are failing. As the article notes, the market is fractured and illiquid, price quality is going to be second rate. It does not how good the bond pricing services is, you can't make a silk purse out of a sow's ear.
From the article it sounds like neither the bond fund NAV or ETF bid-ask prices are any good. The NAV has stale prices. The ETF price has some quick estimate of what the price should be.

Consider Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX). It holds 1894 different bonds. Suppose some new information come in. The bond traders have to make a bid/ask price immediately. There is no way that anyone can analyze the impact of the news on 1894 stocks in 10 seconds. So they immediately discount the ETF Bid by 5% to give a margin of safety. That's how the bid-ask spreads get so wide.

Even Treasury bid-ask spread is wide at this time. The 2030 TIPS is currently 90.492 / 97.148. They're doing the same thing. The bond traders just lower their bids to 90 for safety, even though the last trade is something like 95 or 96. So if you wanted to sell your bond today, you will get screwed.
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by vineviz » Thu Mar 19, 2020 9:26 am

grayfox wrote:
Thu Mar 19, 2020 7:28 am
Consider Vanguard Intermediate-Term Investment-Grade Fund Investor Shares (VFICX). It holds 1894 different bonds. Suppose some new information come in. The bond traders have to make a bid/ask price immediately. There is no way that anyone can analyze the impact of the news on 1894 stocks in 10 seconds. So they immediately discount the ETF Bid by 5% to give a margin of safety. That's how the bid-ask spreads get so wide.
Market makers are in the business of analyzing the impact of news two or three orders of magnitudes faster that you suggest. I'm not saying they are always 100% right, but don't bet against them or you'll lose your shirt every time.

Now it's true that bid-ask spreads are largely a function of both liquidity and volatility, but that doesn't obviate the fact that - at any given moment - the ETF price is the best estimate of fair market value you can get.

Is the market always RIGHT? Clearly not, but anyone who thinks that calculated NAV is more accurate than the traded price of an ETF is fooling themselves. I don't think that's what you're suggesting, but a lot of commentary seems to be assuming an accuracy of NAV that - in volatile markets - just isn't there.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by AlohaJoe » Thu Mar 19, 2020 9:37 am

MotoTrojan wrote:
Thu Mar 19, 2020 6:41 am

I can agree with this logic but it still raises an eyebrow when two massive S&P500 ETFs (say VOO & SPY) are more than 1% off intra-day. If they can't agree on a price to within 10bp on the most liquid equity index in the world, I don't know how you can say what is most trustworthy.
SPY has over 20x the liquidity of VOO. That's bigger than the liquidity difference between the biggest company in America and the smallest company on the S&P 500, I think.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Thu Mar 19, 2020 9:57 am

vineviz wrote:
Thu Mar 19, 2020 9:26 am
Market makers are in the business of analyzing the impact of news two or three orders of magnitudes faster that you suggest. I'm not saying they are always 100% right, but don't bet against them or you'll lose your shirt every time.
So let me extend this. You can price a portfolio bottom up, which is how you calculate NAV. You the the latest prices of all 1800 bonds and figure out what you have. First, take a look at a 5 year Treasury. Its been traded heavily, high quality price data. Yeah! Next, take a look at a 5 year old 10 year Treasury. It probably has not been priced recently. Its price data is curd.

Or you can do it top down. Figure out what the yield curve is, add a credit or liqudity premium, bob's your uncle. Fewer inputs but a few more assumptions. It updates faster than the slower piecemeal pricing data.

Usuually the 2 methods gets withing a few bps during normal times. However, top down is proabbly modling the price of a 5 year old 10 year treasury better the stale prices are.
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by sjwoo » Thu Mar 19, 2020 10:03 am

Just to get Blackrock's pov on this, I called them and asked about the +10% difference between the market price and the NAV of FLOT. They are sticking with the NAV; that is what they believe the value of the ETF to be, never mind the current getting price. They also said all of their ETFs are for long term holding, even short term funds like these.

CDs and VGSH it is... I'll never make this mistake again.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by MotoTrojan » Thu Mar 19, 2020 10:04 am

AlohaJoe wrote:
Thu Mar 19, 2020 9:37 am
MotoTrojan wrote:
Thu Mar 19, 2020 6:41 am

I can agree with this logic but it still raises an eyebrow when two massive S&P500 ETFs (say VOO & SPY) are more than 1% off intra-day. If they can't agree on a price to within 10bp on the most liquid equity index in the world, I don't know how you can say what is most trustworthy.
SPY has over 20x the liquidity of VOO. That's bigger than the liquidity difference between the biggest company in America and the smallest company on the S&P 500, I think.
I would think at a certain point there are diminishing "returns" and a fund should be liquid enough to arbitrage anything more than a handful of bp away. I struggle to imagine a 1% delta intra-day even if SPY was 2-million-X the liquidity of VOO, relative to VOO's current volume.

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by Angst » Thu Mar 19, 2020 10:06 am

My current understanding of this situation is that stale prices d/t poor liquidity and large spreads are making NAV less (or a lot less) meaningful, perhaps compromising the AP creation/redemption process. My concern (with Vanguard MF/ETF pairs in particular) is that when the ETF is closing at a big discount to NAV but I'm buying the mutual fund equivalent that night, I might be buying a mutual fund that's really worth significantly less than what I'm paying, i.e. less than what I would get if I'd bought the ETF instead.

Is this a reasonable assessment?

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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Thu Mar 19, 2020 10:26 am

sjwoo wrote:
Thu Mar 19, 2020 10:03 am
Just to get Blackrock's pov on this, I called them and asked about the +10% difference between the market price and the NAV of FLOT. They are sticking with the NAV; that is what they believe the value of the ETF to be, never mind the current getting price. They also said all of their ETFs are for long term holding, even short term funds like these.
Former mutual fund accountant here. By regulation this is basically what they have to say. You build a pricing system. It gets tested multiple different ways, from internal controls to outside auditors and regulators. And then it gets set in stone. If you want to change the system you have to go through the process again. They can't modify the system or the price just because it was spitting out results you don't like. The fact that the underlying markets are wonky are not enough to change the system.

They either have to follow the system or violate the regs. Of course they are going to tell you that they are following the rules and are not committing volitions that could get the fund family fined or shut down.

As I have said eelier in this post, I would trust the market's price over the accountants estimate of the NAV. Ignore the noise.
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by alex_686 » Thu Mar 19, 2020 10:47 am

One more thought: The primary difference between mutual fund pricing and ETF pricing is that mutual fund pricing is done behind close doors. ETFs are done out in the open. With ETFs you get to see how the sausage is made, with mutual funds it comes in a nice wrapper. However, at the end of the day, sausage is sausage.
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Re: ETFs at Discount to NAV: Anyone Freaking Out?

Post by nisiprius » Thu Mar 19, 2020 11:30 am

First, alex_686 knows infinitely more than I do about what actually goes on inside.

Speaking from the outside, as an investor, and speaking as someone who dislikes ETFs and has only used them twice: no, the discount from NAV doesn't freak me out. It's fine. I don't think it should be a concern with unleveraged, broad ETFs of the kind Bogleheads generally use.

It's something to understand about ETFs. It's also a reason to be cautious about ETFs holding anything where there might be a concern about liquidity. For the actual ETFs I, personally, would consider owning, it has never amounted to much and it self-corrects. I'll use iShares TIP, which is a TIPS ETF, for the excellent reason that I once owned it. It's hard to know what to compare it to, because Morningstar doesn't have an actual TIPS index. I'll compare it to VIPSX, the (old, investor class) Vanguard TIPS fund, not an index fund, for the simple reason that I was using TIP as a substitute for VIPSX, in my Fidelity account, to avoid the mutual fund transaction fee.

Over the lifetime of TIP, there isn't any place where the two lines gape.

Source

Image

Let's look closely at the financial crisis, when we know there were TIPS liquidity issues:

Image

And now let's look at the last few days:

Image

Again, I dislike ETFs, but I see no evidence of there being any "freak-out" sized problem, and even if there is a divergence it's not even clear that that it the difference is unfavorable to ETFs.

Yes, however, it could possibly be a minor issue if you desperately wanted to sell a big amount on a specific day. It could possible be more than a minor issue in some weird, marginal ETFs.

And it definitely means that claims that ETFs are just plain better than mutual funds, all the time, every way are dubious. Discounts to NAV, and bid-asked spread, exist and fluctuate and make it hard to judge how to balance that against claims alleged tax-efficiency, microscopically lower ERs in some cases for some ETFs, etc.
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