Buried deep in the prospectus for the three newly launched Vanguard ETF Portfolios is the standard industry disclaimer: units of exchange-traded funds may trade at premiums or discounts to their net asset value (NAV).
That was emphatically true on Feb. 5, a day when equity markets plunged around the world. Despite the market carnage, each of the five-day-old Vanguard ETF Portfolios ended the day at prices higher than their previous daily close on the Toronto Stock Exchange.
What's wrong with this picture is that the market closing prices were at steep premiums to the net asset values of the underlying ETFs that the portfolios hold. These wide discrepancies illustrate one of the lesser known and less publicized risks associated with the ETF structure over the very short term. They also raise questions as to what, if anything, ETF providers can or are willing to do to mitigate trading risks.
