Working out the ETF premium/discount factor

ChilliBob

Hey guys,
I have read that ETFs also trade at premiums or discounts, just like Investment Trusts. However, unlike Investment Trusts where this is made very clear on investing platforms/trustnet and the like it doesn't seem to be obvious anywhere for ETFs. 

Purely as an example I looked to this ETF: https://www.fidelity.co.uk/factsheet-data/factsheet/IE00BYXVGZ48-fidelity-ucits-icav/key-statistics
We can see the Net Assets are: 197.58 and total net assets are 248.46. 
Average volume is what I assume to be the volume of shares in circulation so to speak, so that's 29,847.61.  (Edit, just found out that's traded over 12 months)
Total Assets/Volume = 8,324.. which is miles out from the price of 506-507!

I thought I'd have a look at the factsheet to try and find the volume, this had outstanding shares for the share class, and two different assets values. Both ended up yielding more like 8.xx - nowhere near the 500 odd price.

Clearly I'm doing something wrong, any pointers?!

underground99

Ignore 'volume' in your calculations as that's just the number of shares that happen to trade on the stockmarket on a typical day or week or month. If there are no trades in the shares, the shares still exist.

May be easier if you look at the 'fund provider factsheet' on the 'charges and documents' tab.  At 31/1/2021 they have USD 323.77 million of net assets for the fund, and USD 273.12 million of net assets for that particular share class you are looking at. They also had 39,850,000 shares in issue for this share class.

If you divide the $273.12m by 39.85m shares you get $6.85 per share, though this is simple maths with some rounding.   At 31/1, the exchange rate was about $1.37 to the pound (again with rounding, and depending on what time of day the data is cut), so the $6.85 per share would have been worth about a fiver.   As markets closed on 29 Jan, the shares had been trading for £5.04 according to the performance chart, which looks about right. On the London exchange the same fund class trades as FGQD in GBP and FGQI in USD; the ones priced in dollars that day were going for $6.91 according to Google reported trades for FGQI, which is similarly similar to the calculated NAV per share. 

As it's a basic index of stocks trading in multiple currencies and on multiple exchanges, for which creation or cancellation of shares in large volume is possible because it's an ETF, you would imagine price arbitrage would make the price roughly the same as the NAV subject to supply and demand factors here and there.  It is not as big or popular as some ETFs and so won't have as perfect liquidity as some others.

Thrugelmir

ChilliBob said:

Clearly I'm doing something wrong, any pointers?!

In the markets there are two prices. The one that someone will sell you the stock for and one that someone will buy the stock from you at.  ETF's are simply shares created to invest in a basket of underlying assets. No different to investment trusts. Supply and demand primarily drives the price. 

ChilliBob

underground99 said:

Ignore 'volume' in your calculations as that's just the number of shares that happen to trade on the stockmarket on a typical day or week or month. If there are no trades in the shares, the shares still exist.

May be easier if you look at the 'fund provider factsheet' on the 'charges and documents' tab.  At 31/1/2021 they have USD 323.77 million of net assets for the fund, and USD 273.12 million of net assets for that particular share class you are looking at. They also had 39,850,000 shares in issue for this share class.

If you divide the $273.12m by 39.85m shares you get $6.85 per share, though this is simple maths with some rounding.   At 31/1, the exchange rate was about $1.37 to the pound (again with rounding, and depending on what time of day the data is cut), so the $6.85 per share would have been worth about a fiver.   As markets closed on 29 Jan, the shares had been trading for £5.04 according to the performance chart, which looks about right. On the London exchange the same fund class trades as FGQD in GBP and FGQI in USD; the ones priced in dollars that day were going for $6.91 according to Google reported trades for FGQI, which is similarly similar to the calculated NAV per share. 

As it's a basic index of stocks trading in multiple currencies and on multiple exchanges, for which creation or cancellation of shares in large volume is possible because it's an ETF, you would imagine price arbitrage would make the price roughly the same as the NAV subject to supply and demand factors here and there.  It is not as big or popular as some ETFs and so won't have as perfect liquidity as some others.

Thanks, that's, really helpful and makes a lot of sense. I guess I was looking into this from the perspective of some more niche etfs and thought this may vary more widely. I'll use the above as a guide for looking into others. Cheers

ChilliBob

Thrugelmir said:

ChilliBob said:

Clearly I'm doing something wrong, any pointers?!

In the markets there are two prices. The one that someone will sell you the stock for and one that someone will buy the stock from you at.  ETF's are simply shares created to invest in a basket of underlying assets. No different to investment trusts. Supply and demand primarily drives the price. 

Yeah, that makes perfect sense, just seems odd the discount and premium are mentioned all the time with ITs, and are front and center in platforms, yet invisible (on platforms) with ETFS.. But they are there as there are articles discussing such a thing.

I'm aware of the buy and sell prices, and too wide a range of spread is something to take into careful consideration before buying.

Im struggling to connect the dots, there may bit be any, between this spread though and a possible premium or discount. 

Thrugelmir

ChilliBob said:

Thrugelmir said:

ChilliBob said:

Clearly I'm doing something wrong, any pointers?!

In the markets there are two prices. The one that someone will sell you the stock for and one that someone will buy the stock from you at.  ETF's are simply shares created to invest in a basket of underlying assets. No different to investment trusts. Supply and demand primarily drives the price. 

yet invisible (on platforms) with ETFS.. 

ETF's publish daily valuations in the same way IT's do. Though this information is always historic. Unless you are monitoring your portfolio using a live price stream. Then unfortunately as a retail investor you'll remain behind the curve when it comes to trading stocks. Others will spot the discounts well before you do. 

IT's are more opaque. As don't disclose full list of portfolio holdings that frequently. Whereas ETF's are totally transparent. 

ETF's are cheap. Not always fair value. 

Voyager2002

Thrugelmir said:

ETF's are simply shares created to invest in a basket of underlying assets. No different to investment trusts. Supply and demand primarily drives the price. 

There is one important difference: from day to day, the number of shares in an Investment Trust is fixed, so if there is strong market demand then they can trade at a substantial premium. With ETFs, when shares are trading at a premium it is profitable for the "authorised parties" to create and sell new shares, meaning that a large premium is likely to disappear fairly rapidly.

The message I take from this is that if an ETF is at a premium it would be wise to wait a few hours before buying, while if it something that I  want and is at a discount, swift action is required.

ChilliBob

Voyager2002 said:

Thrugelmir said:

ETF's are simply shares created to invest in a basket of underlying assets. No different to investment trusts. Supply and demand primarily drives the price. 

There is one important difference: from day to day, the number of shares in an Investment Trust is fixed, so if there is strong market demand then they can trade at a substantial premium. With ETFs, when shares are trading at a premium it is profitable for the "authorised parties" to create and sell new shares, meaning that a large premium is likely to disappear fairly rapidly.

The message I take from this is that if an ETF is at a premium it would be wise to wait a few hours before buying, while if it something that I  want and is at a discount, swift action is required.

That sounds like a good plan, it does seem a bit of a faff to actually work it out though with patchy info. E. G. If you use a factsheet it's already out of day by quite some days

Unless you have discovered any other nifty ways to do this?! 

Thrugelmir

Voyager2002 said:

Thrugelmir said:

ETF's are simply shares created to invest in a basket of underlying assets. No different to investment trusts. Supply and demand primarily drives the price. 

With ETFs, when shares are trading at a premium it is profitable for the "authorised parties" to create and sell new shares, meaning that a large premium is likely to disappear fairly rapidly.

That'll depend very much on the liquidity in the underlying market. Tracking the S&P500 will have far more "AP's" than one say tracking the Nigerian stock market. 

Retail investors deal through market makers who'll be trading on their account as well. 

[Deleted User]

Ramin from Pensioncraft recently did a great video (and I was surprised how complex it is) of ETF pricing
It is actually about Cathie Wood's Ark fund - but he goes into a tutorial on ETF pricing and the role of brokers (and the problems with ETFs with large investments in smaller companies)
07:19 in
https://youtu.be/LS7lVaW8mvY

Thrugelmir

Same principles apply to passive tracking funds. Who sits on the other side of the trade. At the time of high redemption levels.