Taking a break from coronavirus we’d like to take a moment to preach looking before you leap. Right now, many of you have the right idea that this is the time to put some money to work in the market. We generally agree with that sentiment, especially for younger investors, but also want to tell a cautionary tale.
Below is the graph that shows the journey of a poor soul who tried to act on a good idea and clearly didn’t know what they were getting themselves into.
What you just squinted at is a graph showing the price and NAV (Net Asset Value) of an ETF. This ETF, like all others, is a bucket of securities that you can trade throughout the day like a stock. The price indicates what people are willing to pay for that bucket, and the NAV is what the contents of the bucket are actually worth.
The graph is pretty boring until you get to this massive discrepancy toward the end. Here you see the blue line (price) go up dramatically, and the orange line (NAV) drop slightly. Price premiums and discounts in ETF’s aren’t unheard of, but this was an extreme situation. This is a position we follow so we naturally called the fund sponsor to get the full story.
As it turns out this is where the aforementioned poor soul caused what you see here.
This person made 3 mistakes: 1) They entered the wrong type of order for the purchase 2) they entered it at a time when you are advised not to trade these products and 3)the trade was for a substantial number of shares which they really shouldn’t have been entering themselves at all. These are all big-time trading no-no’s, and they paid dearly for them.
Some very unkind person took advantage of these errors, executing the order at a roughly 12% premium to NAV. What this meant for the buyer is that the next time someone properly traded this ETF that price would snap back to NAV (which it did) locking in an 12% loss overnight.
I cannot tell you the sympathy I feel for this unsuspecting victim, but may we all learn well, hysteria is not a reason to rush. Financial instruments are not toys and had this person taken their time they may have not lost 12% almost instantly. This ETF is a perfectly fine instrument and will do its job if used properly. Those discrepancies in price and NAV are a known component of trading those securities. Consider this a friendly warning to anyone considering casually picking up ETF trading right now.