Frequently Asked Questions

What are premiums and discounts, and why do they occur?

Exchange-traded products have two relevant "prices." There's an ETP's net asset value (NAV), which is the total value of the underlying securities making up the product. Then there's the price at which ETP’s shares trade.

If an ETP's share price is trading above its NAV, the ETP is said to be trading at a "premium." If the share price is below NAV, however, the ETP is trading at a "discount."

In calm markets, an ETF's share price stays at or very near its NAV. But premiums and discounts can arise in times of market stress or due to supply/demand imbalances between the ETP and its underlying securities.

For example, if investors suddenly start bidding up an ETF, the ETF's share price may exceed the value of its underlying securities, and a premium may result. Likewise, if investors suddenly begin selling an ETF, its price may fall further than the value of its underlying securities, and a discount may result.

In other cases, premiums and discounts may be the result of a timing mismatch: If the market in which the ETF trades is open, but the market in which its underlying securities trade has closed, pricing can become dislocated. Premiums or discounts can result.

Many volatility-linked ETPs are exchange-traded notes (ETNs), which are debt securities issued by the sponsor (typically a bank). ETN’s don't have a Net Asset Value, and instead publish an indicative value (IV) based on what the notes would be worth if redeemed at any given point in time. Even though ETNs don't hold underlying securities, premiums and discounts can still arise when an ETN's supply of new shares is cut off -- sometimes an ETN issuer may suspend creations due to capacity limitations.

 

Investments in ETPs involve risk, including the possible loss of principal, and are not appropriate for all investors. Non-traditional ETPs, including leveraged and inverse ETPs, pose additional risks and can result in magnified gains or losses in an investment. Specific risks are outlined in the fund prospectus and may include concentration risk, correlation risk, counterparty risk, credit risk, market risk, interest rate risk, volatility risk, tracking error risk, among others. Investors should consult with their tax advisors to determine how the profit and loss on any particular investment strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations. The information in this program is provided for general education and information purposes only. No statement within this program should be construed as a recommendation to buy or sell a security or to provide investment advice.