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If an ETL debates liquidating its fund, meaning its board says yes but the shareholders must still vote, and the ETF's price reflects the underlying value of the securities that it holds, what would cause the ETF to rise in value while the securities that it holds are not rising in value?

For an example, if an ETF chooses to liquidate its fund, and investors don't sell the ETF - in theory - they will receive the funds of the ETF as measured by the underlying price of the securities that it holds, such as the SPY ETF liquidating would still reflect the current value of the S&P 500 if it liquidated. Yet, using that theoretical SPY liquidation (not happening at all), if the SPY announced this, and it rose 10% while the S&P 500 did not, that seems to imply that the SPY ETF's price does not reflect the underlying securities.

  • How well do you understand the arbitrage mechanism that changes how many SPY shares exist? – JB King Jul 20 '15 at 16:31
  • @JBKing This is the extent that I understand it: investopedia.com/articles/investing/032615/…. When an ETF liquidates, it liquidates at the NAV, not the current demand? That may explain why I'm see the difference. – user541852587 Jul 20 '15 at 18:43
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what would cause the ETF to rise in value while the securities that it holds are not rising in value?

If there are more buyers than sellers, that could cause the price to go up as a way to attract sellers. At the same time, if the difference is there then some may use the Creation/Redemption mechanism to create/redeem existing shares. Thus, if the price of the ETF is greater than the underlying securities' price then there are participants that will buy the underlying securities and exchange them for the ETF and then sell the ETF shares for a quick profit. Of course it is worth noting that one has to know what is the underlying set of securities that can be exchanged in-kind.


If you look at quotes, there will often be a difference between what an ETF last traded at and what the underlying securities are worth. These differences generally get minimized by authorized participants either creating new shares or redeeming existing shares to take advantage of the spread that exists which is why I have the comment above and this answer.

  • I think you're saying that no price difference should exist between the fund and the underlyings (which is what I would expect). But OP seems to be saying that there is an example of such a difference (although OP did not include it). So is there any reason why such a difference might happen? – dg99 Jul 20 '15 at 22:28

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