If you're a closed-end fund trader, you're all too familiar with the concept of discounts to NAV. Since CEFs are fixed baskets of securities, they trade like stocks on the exchanges - based on supply and demand. That often means that investors are only willing to pay less than fair value for the portfolio (or a premium if the perceived demand is high). CEFs trade this way because there are only a fixed number of shares available.
ETFs typically don't behave this way. They have a share creation/destruction mechanism in place that keeps share prices very closely to their underlying NAVs. Any discount or premium to NAV is usually very small in nature.
But that hasn't been the case lately for an unusually large number of ETFs. The rapid economic shutdown from the coronavirus, the subsequent liquidity crunch across all areas of the economy and the unprecedented fiscal stimulus package from the Fed have all teamed up to create an unusual degree of instability in the marketplace.
Large swings in demand for certain sectors have caused even ETFs to deviate from their underlying values much in the same way the price of hand sanitizer shot through the roof when coronavirus fears first took hold.
As you might expect, the most significant disconnects come from the areas of the market that currently have the highest risk (e.g. junk bonds) or products in which few shares trade and there is simply a lack of an adequate number of buyers and sellers.
Some of these discounts could be viewed as short-term in nature and a bargain buying opportunity. Since we rarely see this type of behavior in ETFs, it's difficult to say for sure if these are good deals or not but they're worth identifying in the event that they are.
Here are some of the largest current NAV discounts in the ETF space.
Arrow DWA Country Rotation ETF
Cambria Value & Momentum ETF
VanEck Vectors High Yield Municipal ETF
VanEck Vectors Short-Term High Yield Municipal ETF
High Yield ETF
WisdomTree Interest Rate Hedged High Yield Bond ETF
Global X MSCI Nigeria ETF
As you can see, the list is dominated by junk bond ETFs, one of the most polarizing areas of the market. The coronavirus has exposed the financial conditions of not just debt already rated junk, but BBB bonds that are now getting downgraded into junk.
Once the market stabilizes, I'd expect these funds to begin seeing their discounts shrink and trade closer to their NAVs, but who knows where this goes in the short-term.
On the flip side, here are some of the largest premiums.
American Century Focused Large-Cap Value ETF
Direxion Daily Mid Cap Bear 3X ETF
Breakwave Dry Bulk Shipping ETF
United States Oil Fund
A little bit of everything here. The shipping sector has been highly volatile and incredibly beaten down, so the disconnect isn't surprising. Same story with oil. USL is trading at a similar premium, so it's disconnecting across the board.
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