ETFs With the Biggest Premiums, Discounts

Efficient pricing is high on the list of selling points for exchange-traded funds.

Unlike closed-end funds, which are also bought and sold on an exchange but can trade at big discounts or premiums to their net asset values, ETF share prices tend to closely track the value of their holdings.

That's because they benefit from a complicated arbitrage mechanism: Institutional traders can assemble large baskets of the underlying stocks, exchange them for ETF shares and sell at a profit. If an ETF is trading at a discount to its NAV, arbitragers can buy the fund's units in bulk, exchange them for the underlying securities and then sell these securities at a profit.

For example, for the 13-week period ended Oct. 27, 2006, the absolute difference between the market price and the NAV of the average closed-end fund tracked by TheStreet.com Ratings was 6.97%. That was 77 times wider than the absolute difference for the average ETF, which came out to a microscopic 0.09%. ...