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Salomon Releases ETF Premium/Discount Study By John Spence, Associate Editor Last Wednesday, 10/18/2000, the Salomon Smith Barney Closed-End Funds Research Group released a supplement to its larger quarterly report, "Fundamentals for Exchange-Traded Funds." As part of the supplement, Salomon analysts conducted a premium/discount study with exchange-traded funds (ETFs) to back up their claim that investors should not look at traditional liquidity measures when it comes to ETFs. The main characteristic of ETFs that limits premiums and discounts is their creation/redemption feature. A specialist can create or redeem ETFs daily through "creation units" - he or she can create new shares to meet demand or terminate shares to quell supply on a daily basis. If the market maker is not keeping the price reasonably close to the underlying net asset value (NAV), institutions can arbitrage any inefficiencies. As Lee Kranefuss of Barclays Global Investors recently pointed out, comparing last trade and closing NAVs for ETFs can be misleading because many ETFs trade infrequently. In some cases, the last trade could have been hours or even days before the the NAV was calculated. To test how well the creation/redemption process works, Salomon analysts took random "snapshots" of U.S. ETFs for the month of September (no international ETFs were included in the study). They compared the bid price, ask price, and midpoint between bid/ask to the intra-day value. Intra-day value is an estimated NAV calculated for ETFs every 15 seconds and is available from several quote services. In general, the study concluded that the creation/redemption process is working, and that in 91% of the sample, ETF intra-day values were in between the bid and ask. Premium/Discount Study Overview
From the above table, it can be deduced that the average ETF had a bid price which was at a 0.167% discount to actual intra-day net asset value. The cap-weighted average was a 0.039% discount (On occasion, however, ETFs experience real-time discounts of over 1% to their NAV, and premiums of over 0.5%). Liquidity Measures in ETFs
The above table shows the average bid/ask spread and sizes found for all of the ETF "snapshots" in the study. The above data is available for every fund in the study in an appendix to the Salomon study. Salomon analysts also said that they expect the launch of more ETFs in the coming months, and that actively-managed ETFs may be on the horizon. For a table with ticker symbols for intra-day NAV, closing NAV, and shares outstanding for ETFs, click here. 10/23/2000 |
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