Beware the Flaws of Trading ETFs

There seems to have been an increase in anti-ETF sentiment of late. For example, over the weekend, a must-read article in The Wall Street Journal explored a potentially important trading issue that manifested itself during the recent market turbulence.

According to the article, the iShares FTSE Xinhua China 25 Index Fund (FXI Quote - Cramer on FXI - Stock Picks) strayed more than 7% below its underlying net asset value on Feb. 27. The article then notes that most of that gap closed the following day -- a price within 0.5% of NAV is considered normal. Unfortunately, the data on the iShares Web site was not current enough for the discrepancy to be seen firsthand.

The article rightly points out that anyone selling FXI on the 27th was effectively short-changed, while buyers lucked out and got a small boost as the gap closed.

In a lot of the articles I write about new ETFs, I suggest giving a new fund a little time to season. That advice doesn't apply here, because FXI has already been trading for a while.

The fund strayed from its NAV at a time of elevated fear in the market, and this strikes me as the type of thing that might happen again. This decoupling also appears to have happened to some other Asian ETFs; the article notes similar behavior in iShares Malaysia (EWM Quote - Cramer on EWM - Stock Picks).

So if you own these ETFs or any others that might stray for a day or two, what should you do?

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