I have made 3 very small purchases this week into an etf that opened in May and has an AUM under 4M. All were attempted for specific $$ amounts “at market”. Twice Fido posted a message (roughly stated): “Fidelity does not purchase illiquid securities. Please enter a limit order.”. I initiated a limit order and the trade went through quickly. But, interestingly, on the 2nd order (out of the 3) they put it through for the set $$ amount “at market”. The fund is GLDB - a weird blend of gold and corporate bonds which I’m sure nobody else would want to own.
- Question: Is it probable the reason for the designation of “illiquid” is based on the small AUM and a relatively small number of shares currently changing hands?
- Another detail: In reading the prospectus
I came across something of a disclaimer
stating that shares do not trade at NAV but that NAV is calculated at the end of each reading day. Is this typical of ETFs?
- The fund pays monthly interest & as with all my funds I’ve selected the “reinvest” option. It appears to be in effect. But I’m thinking they may not actually be able to reinvest the proceeds at market value if the fund is still considered “illiquid.” In that case, I’m confident the $$ will go into my core account. Might be a struggle reinvesting “chump change” into full or fractional shares?
As far as GLDB goes … Fido showed the bid and offer prices when I begin to transact. So I understood the situation. ISTM I did sacrifice 10 cents per share (the bid prices were lower than the ask prices). Not much of an issue for me. Yes - I’m sure it’s lightly traded!
PS - What’s curious is I was able to get one of the 3 buys (the middle one) to go thru at “market.” So this liquidity gig must vary from hour to hour depending on flows.
I would think etf NAV's change continually like SPY or QQQ.
If an ETF's holdings have instantaneous values but nobody adds them together moment by moment, does it have intra-day NAVs?
From SPY's prospectus:
"The trading prices of the Trust’s Units will fluctuate continuously ... based on market supply and demand rather than the Trust’s NAV, which is calculated at the end of each Business Day.
NAV is calculated at the end of each reading day. Is this typical of ETFs?
Yes. From BlackRock:
" The market price is different to an ETF’s NAV which shows the official value of the ETF once a day, based on the closing prices of the underlying securities."
shares do not trade at NAV
They trade at typically small premiums or discounts to (intraday) NAV. How small a difference depends on liquidity of the underlying securities and to some extent the trading volume of the ETF itself.
From Vanguard's Understanding ETF liquidity and trading:
"Although trading activity and market depth on the stock exchange contribute to an ETF’s secondary market liquidity, most of an ETF’s liquidity comes from its underlying securities"
I periodically view a watch list I have set, at Google Finance, and "see" the changing NAV's throughout a trading day.
It may be calculated based on yesterday's ending portfolio. That is, for example, the way Precidian Active Shares provide what they call a verified IIV (VIIV). https://www.sec.gov/Archives/edgar/data/1499655/000114420419018151/tv518160_40-appa.htm
More customarily, the calculation, still performed by third parties, is based on daily creation baskets. The issue here is that creation baskets often do not precisely replicate what is in the portfolio. https://www.sec.gov/Archives/edgar/data/1499655/000114420419018151/tv518160_40-appa.htm
It gives one pause to consider that an ETF might specify baskets for creating and redeeming shares (by authorized participants) that don't match. (This can be used as a mechanism for changing the holdings of an ETF.)
"The composition of the redemption basket typically mirrors that of the creation basket." But it doesn't have to.
Note that Precidian ETFs and several others are the newer active nontransparent ETFs. These have different portfolio disclosure rules than those for passive/indexed ETFs (95-96%?).
Investopedia attempts to describe key differences between ETFs and CEFs. https://www.investopedia.com/ask/answers/052615/what-difference-between-exchange-traded-funds-etfs-and-closed-end-funds.asp
PS - Unless the forest was completely devoid of man, beast or fowl when said tree fell, there should have been sound. In any case, the sound waves are still echoing somewhere …
Say that the market is rising rapidly, and in anticipation traders are bidding up an ETF's price even more quickly. So the ETF is priced at a small premium. As a retail investor interested in buying the ETF, are you going to hold off until that premium vanishes (assuming you're even looking at the IIV)? Or are you going to buy the ETF now before the price shoots up some more?
What is a possible scenario where a retail investor changes a buy/sell decision for an ETF based on its IIV? If it makes a difference, assume whatever you need about how current the IIV figure is.
ISTM that only APs care about the actual value of an ETF portfolio as opposed to what an ETF is selling for on the open market. That's so they can arbitrage the difference. For them, 15 seconds isn't good enough - they run their own internal calculations.