An ETF price might be slightly different than its underlying assets' one because the latter trades in the primary market and the former in the secondary one (font: ETFs bubble see minute 5:30).

Taking this into account, in an hypothetical ETFs / index funds collapse, can it happen that this difference goes off to very high levels?

If so, is technically possible that, after a crash, the ETF's underlying assets' come back to 'normal' values while the ETF itself is stuck at a very low price?

  • 2
    If the difference between ETF share price and NAV gets sufficiently large, someone will use that as an arbitrage opportunity. And there's usually a creation/redemption process that lets authorized participants convert between a block of ETF shares and a basket of shares held by the ETF.
    – amon
    May 31, 2020 at 6:13
  • @amon what is the difference between a block of ETF shares and a basket of shares held by the ETF?
    – Martel
    May 31, 2020 at 9:25
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    It means authorized participants can exchange their ETF shares with the assets held by the ETF. In the video's example, it would be like if the market maker could exchange 5000 shares for a parcel of farmland. If the ETF shares are priced correctly then this is a net-neutral exchange for the ETF and the authorized participant. So authorized participants are incentivized to buy the ETF when its price is too low, because they could exchange for the more valuable underlying assets.
    – amon
    May 31, 2020 at 9:54

1 Answer 1


No, that is pretty much impossible. If it could happen, market participants would purchase the ETF while shorting its constituents. They would make money on the difference, and the very act of their doing this trade would tend to drive up the price of the ETF, and drive down the price of the constituents, closing the gap.

These sorts of scenarios, usually a discount in the value of the fund to that of the underlying assets, tend to persist in smaller and more specifically focused closed-end funds.

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