Today is Veterans Day. My father served in the army during the Vietnam War. He lives in Long Island, New York, and I am proud of his service. Today is also a holiday for many. The bond market is closed, yet the stock market is open.
Why am I writing this on a website with the word ETF in the name? A record $260 billion of money has flowed into bond ETFs as of Nov. 7. Advisors and investors are increasingly turning to these securities for income, to serve as a ballast in a stock-heavy portfolio, and for other reasons. Now that the election results are largely known and the Fed has again cut interest rates, we expect demand for bond ETFs to remain high.
Bond ETFs Are Trading on Veterans Day
For those of you planning to buy or sell a bond ETF today, I want to repeat myself: The bond market is closed, yet the stock market is open. Bond ETFs are traded throughout the day on the New York Stock Exchange, the Nasdaq, or the Cboe the same way that Apple or the SPDR S&P 500 ETF Trust (SPY) is.
When the bond market is open, this works extremely smoothly. The value of the bonds inside the ETF are used to determine the price at which someone wants to sell or buy the bond ETF to you. However, when the bond market is closed, like it is today, there is incomplete information. We caution you to be mindful that today could be a different trading experience.
ETFs Can Trade at Discounts or Premiums to NAV
Many of you may know this but it is still worth a refresher. A mutual fund is bought and sold at its net asset value (NAV). However, an ETF is bought and sold at a market price, which can be different from the NAV. When the ETF trades above its NAV, this is known as a premium. When it trades below its NAV, it is known as a discount.
A modest premium or a discount can regularly occur. But a large disparity can be cause for hesitation. Let’s review a few examples from iShares, which provides some great information on their website.
