So ETFs are comprised of a basket of stocks representing an index. So the price of the ETF is meant to reflect the index. Does how does volume affect the price of the ETF? E.g. if no one trades the ETF for several weeks, but there is plenty of trading of the underlying stocks, does the price go up and down? And what if there is a huge surge in volume of the ETF? Wanting to understand.
Basic ETF question
- Thread starter Bigchazza
- Start date
Robert Morse
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Read about Creation/Redemption - https://www.etf.com/etf-education-c...s-the-creationredemption-mechanism?nopaging=1 . If the basket of stocks is being sold in the equity markets, an authorized participant (AP) can buy that basket below the NAV of the ETF, they do that and hedge by shorting the ETF. When buyers come into the basket of stocks, where the AP can sell above the NAV of the ETF, they sell short those stocks and buy the ETF. They then send the basket with the hedge to the ETF manager. This has the effect of creating more of the ETF or shrinking the float. If the ETF has no liquidity, they can't do this.
The ETF trades based upon the ability to do an arbitrage against the underlying basket, rather than what volume has already occurred in it. It actually has three layers of liquidity. First is the order flow of the ETF it’s self. Secondly, is just a little wider than that, what could be executed as an arbitrage against the depth of the underlying. And lastly, The liquidity provided at a wider still spread that would give enough of a profit to have someone create or redeem shares of the ETF in order to fill the order.
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I've NEVER seen any etf that did not move in price for one day/much less than weeks.
And I traded 5 k/day ETFs +70 million million per day/SPY=liquidity leader.
Even in the rare event it closes flat/did not move exactly flat intraday...…………………………...