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Many ETFs Don’t Give You the Return You’re Expecting

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Investor-UpdateOne of the characteristics that is supposed to differentiate exchange-traded funds—and other exchange-traded products, such as exchange-traded notes (ETNs)—from closed-end funds is better pricing. A closed-end fund, which does not alter its share count except for rare secondary offerings, often trades at a premium or discount to the net underlying value of its assets (aka net asset value). ETFs, in contrast, are open-ended funds. They constantly issue and redeem shares. This process is intended to limit any pricing discrepancies. In other words, when you buy an ETF, you are supposed to get the return of the assets the fund in invests in.

This is often not the case. I looked at the difference in 12-month market and net asset value returns for over 1,600 ETFs. (I’ll use the abbreviation ETF to refer to all exchange-traded products, including ETNs.) The market return for nearly one out of five ETFs (19.4%) was more than a full percentage point different than the return of the fund’s underlying net assets for the 12-month period ended June 30, 2016. Worse yet, the difference was greater than five percentage points for 39 funds. Not a 5% difference, but a full five percentage points of difference (e.g., DB Gold Double Long ETN (DGP) had a 12-month market return of 25.7% and a NAV return of 20.7% through June 30, 2016).

I’ll explain the terminology and some of the more common characteristics of the offenders in a moment. Before I do, I want to point out that not every ETF succumbs to the pricing error. Slightly more than 500 funds—representing nearly a third of all ETFs with 12-month return data—either had market returns that matched their net asset value or were within 0.1 percentage points of it. Investors who owned these funds got the returns of the underlying assets.

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