Question

Suppose an ETF has a NAV of $12 at t=0 and $12.10 at t=1. At t=0, the fund sells at a premium of 0.5% to NAV; at t=1, the fund sells at a discount of 0.2% to NAV. Further suppose that the ETF paid income of $1.50 per share.

The ETF return to an investor who buys at t=0 and sells at t=1 is as follows:

At t=0
market price = $ 12 + ($12 * 0.5%) = 12 + 0.0600 = 12.06

At t=1
market price = $ 12 - ($12 * 0.2%) = 12 - 0.0242 = 12.075

Income during the period = $1.50 per share

Return on investment = (12.075 - 12.06 + 1.5)/12.06 = 12.57%

Suppose the investor could have invested in the ETF’s underlying portfolio directly rather than through the ETF, what would have been his return?

Answer 1

Answer:

If the investor could have invested in the ETF's underlying portfolio directly, then no discount or premium would apply to the NAV. Accordingly,

At t=0

Purchase price = NAV at t=0 = $12

At t=1

Sale price = NAV at t=1 = $12.10

Assuming that the Income of $1.5 during the period is generated by the underlying portfolio;

Return on investment = (12.10 - 12.00 + 1.50) / 12.00 = 13.33%