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Pricing of a “fund of funds” ETF?

hank
edited February 4 in Fund Discussions
I know (or think I do) that if you own something like T. Rowe’s RPSIX that the NAV at the end of the day reflects the combined NAVs of the underlying OEFs. But what about an etf comprised of other etfs - all of which trade and reprice continuously during the day? Is the conglomerate etf’s bid / ask price always representative of the aggregate prices of those underlying etfs (which are constantly changing throughout the day )? Or is it more “loosely-goosey” with traders focusing primarily on the bid / ask price of the combined etf? In this case, pricing might not always accurately reflect the value of those underlying funds. For the sake of argument, let’s assume that the underlying etfs are actively managed.

I think I know the answer. It would seem virtually impossible for the bid / ask price of an etf consisting of 30+ underlying etfs to represent accurately the combined price of all of those underlying funds at any given moment during the day. So it would seem that an etf “fund of etfs”’s pricing during the day is much less representative of the value its underlying assets than that of an OEF is when its NAV / price is determined at day’s end. Am I close?

Appreciate any explanations / thoughts.

Comments

  • MarkMark
    I'm no expert but I would think (guess) that pricing an ETF made up off other ETF's would be no less onerous or accurate then lets say pricing a S&P Total US Stock Market ETF or even a Total World Market ETF. One fund that I can think of off the top of my head is AVGE Avantis All Equity Markets ETF but there's probably others out there.
  • BaluBalu
    @hank.

    You got it but I would not concern myself with the issue as long as you are following the other rules of ETF investing.
  • msf
    edited February 4
    The problem described doesn't depend on whether the underlying holdings are ETFs or other traded securities. Either way, the question is whether an ETF's bid and ask prices are representative of the aggregate prices of the underlying securities.

    IOW, what you're asking is just a variant of a question already addressed (knowing an ETF's NAV). In math terminology, your problem can be reduced to a previously-solved problem.
    See Boiling Water joke.

    Until a few years ago, all ETFs were required to publish Intraday Indicative Values (IIVs), aka intraday NAVs (iNAV) every 15 seconds that purportedly "indicated" the NAV.
    https://finance.yahoo.com/news/etf-eulogy-inav-190000321.html

    In this case, pricing might not always accurately reflect the value of those underlying funds.

    That's true for "vanilla" ETFs as well. This is why Authorized Participants exist. They arbitrage away these discrepancies. They buy ETF shares and redeem them when the shares are underpriced, and do the reverse when shares are overpriced. Consequently ETF prices don't wildly diverge from values.
  • hank
    edited February 4
    Regarding the “boiling water” humor illustrating how engineers, mathematicians and physicist may view or define the same problem in starkly different ways and utilize completely different approaches to arrive at a workable solution …

    Same might be said of ”value” “momentum” and ”contrarian” investors.

    Thank guys. It sounds like market forces, especially the role of arbitrage players, serve to keep bid / ask prices fairly well in line with the values of the underlying assets. My error was in thinking small (as in small investors). The big players likely have a gargantuan amount of data about the etf’s holdings on their computers and are able more or less to “ride herd” over bid / ask prices - raking in quick profits if bid / ask get too far out of line.
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