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Navigating ETF Discounts and Premiums During Turbulent Times – A U.S. Example (Part 1)

Recent market volatility has led to extraordinary dislocations in ETF prices.

Ben Johnson 16.04.2020

Key Takeaways: 

  • Market volatility has caused many exchange-traded funds to trade at extreme discounts to their net asset values.
  • ETF investors should understand ETF premiums and discounts and how to best navigate them.
  • If possible, ETF investors should avoid trading during unstable periods in the market. If they must trade, using limit orders is a best practice. And for those investors that don't place any value on ETFs' intraday liquidity, mutual funds offering similar exposure are perfectly suitable options.


Investors Are Flocking to ETFs
As markets have been roiled by the spread of the coronavirus and flailing to price the implications for economic growth and corporate earnings, ETF trading has spiked. Shares of SPDR S&P 500 ETF (SPY), the oldest and largest U.S. ETF, have changed hands in record volumes. On Feb. 28, 2020, SPY's trading volume hit $114 billion--an all-time high, equivalent to 5.6 times its average daily volume during 2019 and representing 43% of its assets under management. According to Bloomberg data compiled by BlackRock, ETF trading accounted for 38% of all equity volume on U.S. exchanges from Feb. 24 through March 13. This compares with an average of 27% in 2019. What explains this uptick?

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About Author

Ben Johnson  Ben Johnson, CFA is the Director of Passive Fund Research with Morningstar.

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