Why does the price of the ETF fluctuate so much during the day? I'm looking at SPDR S&P 500 ETF (NYSEARCA:SPY) candle stick chart for the period March-April. Isn't the ETF manager supposed to reflect the price only when the markets close?
ETFs trade on stock exchanges throughout the day. This is one of the ways they differ from traditional mutual funds. It is good for liquidity as ETFs can be used by both speculators (e.g., day traders) and long-term investors. The fact that they trade throughout the day requires that their prices fluctuate in real time, closely with the underlying stocks. This is because any significant discrepancy can be "arbitraged" by traders who, e.g., if the ETF is underpriced at some moment, buy a large quantity of it and redeem it for the underlying stocks. This arbitrage activity is the main mechanism that keeps the ETF "tracking" its index.
The NAV of an ETF fluctuates during the day as it tracks the price changes in the component securities.
When there is increased supply or demand for an ETF during the day, it may cause a mispricing between the underlying assets and the ETF's price. If it is large enough, it present an arbitrage opportunity for an Authorized Participant. If the ETF's price rises above NAV, the AP may buy the underlying shares at lower prices and sell the ETF at the higher price, capturing the spread (and vice versa if the ETF is trading at a discount to NAV).
If you google "ETF", you'll find this (emphasis mine)
An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated once at the end of every day like a mutual fund does.