etf closing price at a 5% discount to NAV?
i was recently reading this article that says LQD closing price on March 11/12 was at a 5% discount to the NAV. i mean intuitively how is this possible? why don’t someone just do an arbitrage trading and make 5% profit? is it because of a high bid/ask spread so that u can’t trade at a favorable price?
here’s a quote from the article:
Consider the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the largest and most liquid U.S.-listed ETF of its type. On March 11 and March 12, LQD closed at prices that were roughly 5% below its NAV. A look under the hood shows why: most LQD constituents traded infrequently and market sentiment was not fully embedded in individual bond prices. On March 12, for example, LQD changed hands almost 90,000 times on exchange, while its top five holdings traded an average of only 37 times apiece.
heavily sold going into this market meltdown, fed announces they and blackrock are buying these bonds so now they are overbought
yes i know but still shouldn’t NAV=market price, otherwise arbitrage opportunity exists?
if you "know" what is the question? If you want to buy every single individual bond in some sort of arbitrage trade im sure you would pay way more than owning an index on said bonds
No, NAV is a reflection of market price.
How do you value a bond that hasnt traded, and has no bids? You use a model. And that model is probably not fully reflecting the risk off mentality and the need for liquidity in this market. The price your model spits out for the bond will almost certainly be nowhere close to where you could actually sell it in the market.
So NAVs are wrong, the price of the ETF (assuming it is well run and fairly liquid) is a better reflection of the actual value of the bonds in the market, at that particular time.
Consequatur velit repellendus occaecati ut beatae. Nisi similique eum dignissimos asperiores ipsa voluptas eligendi ipsam.
Quo doloribus sunt dolores natus. Sed quas ut eum est. Sed vitae magnam mollitia iste exercitationem nisi odit. Eaque est et suscipit provident atque enim eaque omnis.
Impedit explicabo enim ut sed omnis beatae quia. Voluptas dolores ipsam iste nisi quas non commodi sit. Expedita fuga impedit accusamus ipsum quia.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...