John Spence
Salomon Releases ETF Premium/Discount Study
John Spence
Monday, October 23, 2000
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
| |
vs. Bid |
Intra-day value vs. midpoint |
vs. Ask |
| Average |
-0.167%
|
0.014%
|
0.196%
|
| Cap-weighted average |
-0.039%
|
0.028%
|
0.094%
|
| Maximum |
0.246%
|
0.667%
|
1.108%
|
| Minimum |
-1.481%
|
-1.167%
|
-0.853%
|
Source: Salomon Smith Barney, Reuters
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
| Average bid |
83,795 shares |
| Average ask |
87,438 shares |
| Average spread |
$0.21 |
| Average spread % |
0.36% |
| Cap-weighted avg. spread |
$0.13 |
| Cap-weighted avg. spread % |
0.13% |
Source: Salomon Smith Barney, Reuters
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.
|
Name
|
TICKER
|
Ticker - Intraday NAV
|
Ticker - Closing NAV
|
Ticker-Shares Outstanding
|
|
Diamond Series Trust I
|
DIA
|
DXV
|
n/a
|
n/a
|
|
HOLDR B2B Internet
|
BHH
|
BUX
|
n/a
|
n/a
|
|
HOLDR Biotech
|
BBH
|
IBH
|
n/a
|
n/a
|
|
HOLDR Broadband
|
BDH
|
XDH
|
n/a
|
n/a
|
|
HOLDR Internet
|
HHH
|
HHI
|
n/a
|
n/a
|
|
HOLDR Internet Arch
|
IAH
|
XAH
|
n/a
|
n/a
|
|
HOLDR Internet Infra
|
IIH
|
YIH
|
n/a
|
n/a
|
|
HOLDR Market2000
|
MKH
|
n/a
|
n/a
|
n/a
|
|
HOLDR Pharm
|
PPH
|
IPH
|
n/a
|
n/a
|
|
HOLDR Reg Bank
|
RKH
|
XRH
|
n/a
|
n/a
|
|
HOLDR Semiconductor
|
SMH
|
XSH
|
n/a
|
n/a
|
|
HOLDR Software
|
SWH
|
n/a
|
n/a
|
n/a
|
|
HOLDR TeleBras
|
TBH
|
n/a
|
n/a
|
n/a
|
|
HOLDR Telecom
|
TTH
|
IYH
|
n/a
|
n/a
|
|
HOLDR Utilities
|
UTH
|
XUH
|
n/a
|
n/a
|
|
iShares Dow Jones US Basic Mtrls
|
IYM
|
NLB
|
NZO
|
OCF
|
|
iShares Dow Jones US Chemicals
|
IYD
|
NNE
|
NZU
|
OCK
|
|
iShares Dow Jones US Cons Cyclical
|
IYC
|
NLL
|
NZV
|
ODF
|
|
iShares Dow Jones US Cons Non-Cycl
|
IYK
|
NMJ
|
NGJ
|
OFD
|
|
iShares Dow Jones US Energy Sector
|
IYE
|
NHH
|
NLE
|
n/a
|
|
iShares Dow Jones US Financial Sct
|
IYF
|
NLF
|
NSF
|
OPM
|
|
iShares Dow Jones US Financial Srv
|
IYG
|
NAG
|
NIH
|
OFK
|
|
iShares Dow Jones US Healthcare
|
IYH
|
NHG
|
NIT
|
OFS
|
|
iShares Dow Jones US Industrial
|
IYJ
|
NIJ
|
NIW
|
OFV
|
|
iShares Dow Jones US Internet
|
IYV
|
NNU
|
n/a
|
OAH
|
|
iShares Dow Jones US Real Estate
|
IYR
|
NLR
|
NIZ
|
OFW
|
|
iShares Dow Jones US Technology
|
IYW
|
NJW
|
NAK
|
OCB
|
|
iShares Dow Jones US Telecom
|
IYZ
|
NJZ
|
NEX
|
OSS
|
|
iShares Dow Jones US Total Mkt
|
IYY
|
NLA
|
NTO
|
OFY
|
|
iShares Dow Jones US Utilities
|
IDU
|
NLU
|
NNO
|
OGW
|
|
iShares MSCI Australia Index
|
EWA
|
WBJ
|
n/a
|
n/a
|
|