One 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.
More on AAII.com
- ETFs and ETNs: Knowing What You Own – The ease or difficulty at which a fund’s assets can be traded impacts its performance.
- An Inside Look at Exchange-Traded Funds – An in-depth look at how ETFs are structured and how they differ from mutual funds.
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Highlights from the AAII Journal
- The Individual Investor’s Guide to Exchange-Traded Funds 2016– Our newest ETF guide, which I used to calculate the data discussed above, is now online.
- Model Fund Portfolio: Introducing the Level3 Passive Portfolio – The new Level3 Passive Portfolio is an ETF portfolio comprised of funds that should beat the S&P 500 over the long term.
AAII Sentiment Survey
The percentage of individual investors describing their outlook as “neutral” is at its highest level in two months. Plus, AAII members share their thoughts about the current level of valuations. More about this week’s results.
AAII Asset Allocation Survey
Fixed-income allocations rose to their highest level in more than three years. Brexit was not the reason, as nearly three-quarters of respondents say the referendum’s outcome isn’t influencing their allocation decisions. More about the latest results.
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The Week Ahead
Just 25 members of the S&P 500 will report. The only Dow Jones industrial average component will be Walt Disney Co. (DIS), which will report on Tuesday.
The week’s first financial report will be second-quarter productivity, released on Tuesday. Wednesday will feature the June Job Openings and Labor Turnover Survey (JOLTS). July import and export prices will be released on Thursday. Friday will feature July retail sales, the July Producer Price Index (PPI), June business inventories and the University of Michigan’s preliminary August consumer sentiment survey.
The Treasury Department will auction $24 billion of three-year notes on Tuesday, $23 billion of 10-year notes on Wednesday and $15 billion of 30-year bonds on Thursday.
The new August AAII Journal features our popular ETF guide. This comprehensive guide contains data on performance (including bull and bear market returns), expense ratios, turnover ratios, net asset values and portfolio construction on 473 ETFs and ETNs in the print edition and more than 1,700 ETFs and ETNs on AAII.com. It is a must-read for ETF investors and traders. Join AAII Today and Get the 2016 ETF Guide