Steve from Public Mutual Fund left the following question for me;
What's the significance of a large bid x ask spread on PWC? How is the trading price of this ETF related to its true NAV? I looked at it today, and the spread was about $.30. How do I know I'm buying/selling this ETF at the true NAV price?
Generally speaking the spread is a function of volume. The average volume for PowerShares Dynamic Market is 39000 shares. Some of you may remember PWC as the old symbol for Paine Webber. When you place an order your brokerage firm routes it to the Amex (or more likely the Chicago Stock Exchange or some sort of electronic trade platform). Some sort of professional trader somewhere has to take the other side of your trade. If you want to buy 1000 shares that person that is on the other side has to sell you 1000 shares. That might leave him exposed one way or another with out a realistic expectation about how long it will take to trade out of it. A big spread helps to compensate this type of risk.
As a rule of thumb a wide spread would not be a function of......
Alert! I just got to go on a medical call for our fire department, a tree fell on a guy in a logging crew doing work up here. Very cool to help out with this stuff
.........the NAV of the fund. As far as getting the NAV intraday, the PowerShares page for this fund has it. The page says it recalculates every 15 seconds.
As a question to readers, are postings that address market mechanics useful? Feel free to chime in.
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4 comments:
Ahh ... thanks for the info on the intraday (15s) NAV calculation. I assume the ask price is higher, and the bid price is lower, than the true NAV by some small amount. Not that I'm looking for any arbitrage, but I don't want to get ripped off because of the thin volume.
I enjoy your commentary on market mechanics.........
Thinly-traded ETFs are often subject to this kind of distortion; another thing to watch is the iShares country family...EWM (Malaysia) recently saw some bizarre intraday action that appears to have been a function of former Prime Minister Dr. Mahathir - "George Soros is a capitalist pig and all hedge funds must die" - Mohamad saying the time might come when the country may need to revise its peg to the USD. The market is always right - sooner or later.
I always enjoy discussions of market mechanics.
In the case of ETF's a large spread can be quite common espically when thinly traded, this has been the main disadvantage for the individual investor for some time.
I think it may stem from the cost of creating and liquidating additional shares because this is usually done in fairly large sizes like 10 thousand share blocks.
Of course this is just additional info to what Roger said.
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