You might be aware that some ETFs—notably international stock and bond ETFs—seemed to have had “abnormal price volatility” in recent weeks. Market volatility can have an impact on all investment products, but in this case many investors seemed to question why an ETF’s market price deviated from its stated net asset value (NAV). The appearance of perceived tracking error for international stock ETFs and the occurrence of premiums and discounts (P/Ds) on bond ETFs are things we’ve discussed in the past.

Fair-value pricing resulting from ETF market transactions throughout the U.S. trading day is the linchpin to understanding these issues. In my earlier blog on international ETF returns, I explained how market participants update an investment’s value based on the most current information available, whereas index returns may use stale prices from markets that closed hours earlier. With respect to an ETF’s market price, this was my summarizing point (new emphasis in bold):

Since international stock markets are closed at the end of the U.S. trading day, market participants make bid and ask prices on international ETFs based upon those participants’ estimates of where the underlying securities would be trading if their markets were still open. It is not uncommon to see large “tracking error” for international ETFs on a market-price basis.

To clarify, there are two levers to consider.

  1. Tracking error: ETF market price versus the index.
  2. P/D: ETF market price versus its NAV.

While current news stories have highlighted the premium/discount angle, the underlying issue continues to be the concept of fair-value pricing. The underlying international stocks in the portfolio—the basis for an ETF’s NAV—are closed for trading in their respective local markets while the ETF itself continues to trade. Thus, the ETF represents a more accurate representation of the value of the underlying stocks.

I also covered P/Ds in bond ETFs in an earlier two-part blog. In part 1, I introduced how P/Ds are largely a function of the respective pricing mechanisms for individual bonds and ETFs. In part 2,  I explained how the level and variability of P/Ds can be affected by the trading flow in the market and the liquidity of the underlying bonds, concluding that “the greater the relative pressure to sell an ETF, the lower the level of the bid-ask quote and thus the lower midpoint of that quote. In that case you would see the premium fall or maybe even witness a discount.”

Now, bond ETF P/Ds can be somewhat misleading because transaction costs are more transparent with ETFs than with traditional mutual funds. In times of heavier order flow or less liquidity, the bid-ask spreads of underlying securities could widen to reflect the current market situation, leading to greater P/Ds for bond ETFs. A mutual fund portfolio manager trying to buy or sell the same basket of bonds may also be paying the same bid-ask spread. However, investors do not see those costs in real time; they end up manifesting themselves after the fact as part of the fund’s NAV.

To put a fine point on it: P/Ds in bond ETFs are largely a reflection of the externalization of investors’ transaction costs.

The appearance of P/Ds among international stock and bond ETFs is a natural outcome of the relationship between the ETF and its underlying securities: There are times when market conditions result in higher transaction costs or larger deviations between current and stale security pricing.


Visit or contact your broker to obtain a Vanguard ETF or fund prospectus, which contains investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

All ETF products are subject to risk, including the possible loss of the money you invest. Investments in securities issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets. Bond ETFs are subject to interest rate, inflation, and credit risk.