ETF Valuation

Figure 2 (below) was obtained from the interactive chart provided by Bloomberg.com.  The chart shows price trends for 3 different valuations of SPY (SPY is the stock market’s ticker symbol for the SPDR S&P 500 ETF Trust).

  • SPYNV:IND (red) represents the S&P 500 Depository Receipts Index Net Asset Value, which measures the NAV per share of SPY
  • SPTR:IND (green) epresents the S&P United States 500 Total Return 1988, which measures the total return of 500 stocks in the S&P 500 Index in reference to 1988.
  • SPY:US (orange) represents the share price of SPY.

Fig. 2 SPY’s Index, NAV, and Price movements

In the legend above the chart, the numbers are the closing prices on 9/30/2011.  In the chart, the price movements are expressed as ‘percentage changes’ on the vertical axis in relation to ‘time’ on the horizontal axis.  The parallel behavior of the graphs provide evidence to support (1) the investment goal of the Fund, which is to match the NAV to the performance of the Index, and (2) the effectiveness of arbitrage in matching the share price to the NAV.

Fund documents report the following discrepencies between ETF valuations:

  • Discrepencies between NAV and Index performance are reported as “tracking error“.
  • Discrepencies between share price and NAV are reported as “premium(discount)“.

Copyright © 2011 Douglas R Knight

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