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a. Suppose that an ETF trades at a price below its net asset value. Describe what...

a. Suppose that an ETF trades at a price below its net asset value. Describe what authorized participants (APs) could do to take advantage of this discrepancy. What would be the likely effect of the APs’ actions?

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Answer #1

If the ETF is trading below NAV, APs can take advantage by buying shares in the ETF and shorting an equivalent amount in the underlying index. This will result in a profit when the ETF price converges with the NAV.

The effect of the AP's action is that the ETF price will rise due to buying by the AP. The ETF price will rise until it equals the NAV.

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