ETF valuation

[Did]

Novice here. Looking at vanguard etfs. Was wondering how the they get valued. Is it just the market? But if everyone piles in, do they get overvalued. Or are more issued?
Appreciate any insights,

[Crusader]

More are issued on demand. I believe this was explained in this podcast:
https://canadiancouchpotato.com/2019/08 ... rika-toth/
(there might be a lot of Canada-specific information there, though, it's been a while, but the way ETFs work is the same)

Some people claim that the underlying stocks are forming a bubble due to the index funds, though, but I don't think that's a real danger. This issue was addressed in this podcast:
https://canadiancouchpotato.com/2017/02 ... e-teacher/
also relevant:
https://www.youtube.com/watch?v=ltuqXTwWsZ8

[unemployable]

Most Vanguard ETFs are also offered as mutual funds whose values are calculated by Vanguard based on the underlying assets. For example VTI versus VTSAX. If an ETF traded at a value out of whack with the underlying investments it would create an arbitrage opportunity — sell the ETF, buy the mutual fund and profit.

So not likely in the case of Vanguard.

It is more likely historically that ETFs and closed-end funds trade at a discount to the underlying securities, and investment strategies have been designed to exploit this inefficency.

[Did]

Thanks. I wonder about the Aussie Stockmarket being overvalued due to forced superannuation / retirement savings. But I guess if you go along for the ride it all works out.

Re etfs I’ve been buying a few of the bundles. Down 12 percent from a year ago. Slightly addictive throwing cash in, still better than the pokies.

[jacob]

For example VTI versus VTSAX. If an ETF traded at a value out of whack with the underlying investments it would create an arbitrage opportunity — sell the ETF, buy the mutual fund and profit.

Block redemption keeps ETF within the band of its components +/- the spread+transaction costs at all times. The only way to profit here is to algorithmically follow the bid/ask on both sides on the maker side (so essentially making the spread + fees from posting limit orders) while avoiding getting taken out.

I would expect the ETF companies to have a trading division devoted to doing exactly that.

[WFJ]

U.S. ETFs use something called an "Authorized Participant" to avoid a scenario where a few large buys/sells will impact the price due to a change in liquidity. Much more complex, simple answer is when an investor buys an S&P 500 ETF, the ETF company buys a share of an S&P 500 vehicle from an Authorized Participant which creates or destroys shares as needed, mitigating any stock specific liquidity issues. Many different types of "ETFs" use different mechanisms to reduce buying and selling shares of companies, but trade artificial trusts. One must read the prospectus and call the fund to understand exactly how the shares are created/destroyed.

https://www.investopedia.com/terms/a/au ... cipant.asp