etf

Salomon Releases ETF Premium/Discount Study

etf

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