Daily changes to exchange-traded fund premiums can be predicted in advance with a reliable degree of accuracy by using easily obtained information, says new Morningstar research released Monday.
ETFs are a relatively new investment type, so little has been understood until now about the periodic dislocations between ETF market prices and the discounts or premiums of their underlying net asset values, according to Morningstar analyst Lee Davidson, author of “Examining the Exchange-Traded Nature of Exchange-Traded Funds.”
ETF premiums can be modeled, and daily changes to ETF premiums “show a strong relationship to contemporaneous and lagged movements in the equity market, equity market volatility, and equity market liquidity,” Davidson wrote in his 47-page report. “A larger change in one variable today tends to coincide with a larger change to an ETF’s premium both tomorrow and the day after.”
The Morningstar findings are significant because knowing how ETF premiums and discounts behave can help investors improve trade execution and save money.