ETF vs Mutual Fund arbitrage

[sampitroda93]

Mutual Fund Vs ETF arbitrage


· I am assuming that mutual fund is always traded at NAV at the end of day and the ETF is traded at the market price based on the bid-ask provided by market maker

· During times of stress, assuming etf is trading discount to NAV, is it possible to Buy the ETF and Sell the Mutual Fund to make a profit

· Or vice versa, that is buy the mutual fund and sell the etf when etf is trading at a premium to NAV

· This seems like an obvious arbitrage. Am I missing something here?

 

[gaussian]

Mutual Fund Vs ETF arbitrage


· I am assuming that mutual fund is always traded at NAV at the end of day and the ETF is traded at the market price based on the bid-ask provided by market maker

· During times of stress, assuming etf is trading discount to NAV, is it possible to Buy the ETF and Sell the Mutual Fund to make a profit

· Or vice versa, that is buy the mutual fund and sell the etf when etf is trading at a premium to NAV

· This seems like an obvious arbitrage. Am I missing something here?

You can't get into and out of mutual funds fast enough for this arbitrage to be worth anything.

 

[sampitroda93]

You can't get into and out of mutual funds fast enough for this arbitrage to be worth anything.

I am assuming by fast enough you mean intraday. I think we can enter exit mutual funds on daily basis. Is it possible with 2 to 5 day holding period? For instance several ETF are trading discount compared to mutual funds for over a week now.

any paper or thought will be appreciated

 

[lightninboy]

Nobody has mutual funds except old people with IRAs basically.

 

[Sig]

I am assuming by fast enough you mean intraday. I think we can enter exit mutual funds on daily basis. Is it possible with 2 to 5 day holding period? For instance several ETF are trading discount compared to mutual funds for over a week now.

any paper or thought will be appreciated

What's an example of this? Unless it's an ETN closed to new investment it would be surprising to see a pervasive discount to NAV on an ETF that has an exact match open ended mutual fund.

 

[sampitroda93]

What's an example of this? Unless it's an ETN closed to new investment it would be surprising to see a pervasive discount to NAV on an ETF that has an exact match open ended mutual fund.

An example would be VCLT (etf) vs VLTCX (mutual fund) both are same underlying holdings. One is ETF traded at market price and the other is traded at NAV

 

[Sig]

An example would be VCLT (etf) vs VLTCX (mutual fund) both are same underlying holdings. One is ETF traded at market price and the other is traded at NAV

That's actually a pretty good example. First, the NAV divergence is probably there because the underlying assets are illiquid enough that the creation unit feature isn't worth doing until the NAV diverges by more than a percent or so. Right now it's trading at a .88% premium. The reason it's not really practical to arb it is on the other side though. That particular fund imposes a 1% fee at purchase (https://investor.vanguard.com/mutual-funds/profile/fees/vltcx) so right there the arb is out the window. Vanguard has some pretty strict restrictions on frequent trading of funds, so after your first round trip they'll either reject your order or put a redemption fee on that would wipe out any arb gains, which means it really isn't viable even absent that fee.

As an aside, back in the late 90s you used to be able to kill it with timeline arbitrage of open end international funds. Unfortunately a couple asshats killed the whole thing by doing some inside jobs where they got to choose to put orders in long after the market closed as if they'd put them in before the close to take advantage of after close news that would likely move the fund the next day (highly illegal) and the whole blow-up on that also put a spotlight on the timeline arbitrage play many of us were doing legally and caused all the mutual funds to put restrictions in place to make it impossible to do. So at this point, very hard to arb with an open ended fund. Nice find though and thanks for bringing it up!