IF.com: It'll pass the NAV?

LK: Yes, you're trading past the time when the NAV was calculated. So suppose that new information comes out on the top holding in the fund - at 4:02 p.m. a big announcement is made. You would expect the ETF to change in price to reflect the announcement, and that traders would take that into account and re-price the ETF. So there's one case where you're going to see movement away from NAV.

IF.com: Right, it goes the other way too. If it's a very lightly traded fund and the last trade was at 11:00, the 4:00 NAV could be significantly different.

LK: That's precisely right, and there's a fair number of those, and more specialized funds, so it could be hours since the last trade took place. And that's just on domestics. On internationals, where large NAV discrepancies are reported, remember that you're dealing with stale prices in many cases. So let's take a Japan fund today, at 4:00 today an NAV will be cut on, for example, the iShares MSCI Japan. That's based on closing market prices in Japan, which will have been approximately 16 hours earlier.

IF.com: Right.

LK: That's true of international funds in general - the challenge of international funds is that the NAV is very stale because the stock hasn't been trading. Now, what will happen is the Japan iShare is trading and people are looking at it and seeing the changing value, which is what it should be doing.

IF.com: Absolutely, based on currency trading.

LK: Currency, and also where the U.S. market is, depending on the levels of correlation. What we would expect is that it's being priced properly by 4:00 or 4:15, since Tokyo is going to open in another hour and three-quarters, it should be pretty close to where people expect the open in Tokyo to be on the stocks - not where the close was 22 hours or 16 or 18 hours earlier. So I often point out to people that if the NAV is always the same as the last reported trade on any ETF, particularly an international one, that would be an indication that the interday pricing mechanism is not working properly. It would be a defect - there would be something wrong. The fact that they diverge is indicative of the fact that there is price discovery taking place and that everything doesn't happen at 4:00.

IF.com: What do you propose as a more accurate representation in terms of when they're reported?

LK: I'm not sure I have a perfect proposal. One thing I encourage people to do, and what I do myself, is look at the midpoint of the bid, ask, and spread at 4:00 and compare that to NAV. That gives you a better picture because you know at 4:00 you could go and buy or sell at the bid or ask, so halfway between is some indication of what the market is currently asking for it. And you can compare that to the NAV.

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