Investors in exchange trade funds may experience shock when the ETFs they purchase don’t track the indices on which they are based. For example, exchange traded funds linked to the Japanese stock market have not captured the gains in the rebounded Japanese stock market, according to Sarah Morgan’s Wall Street Journal article entitled “Why ETFs Lag Their Indexes.” To the surprise and dismay of many investors who bought them betting on a rebound in the Japanese stock market, between a March 15 low and April 16, the three U.S. ETFs that track the broad Japanese stock market lost money, even though the indexes they purport to track are up. The ETFs are: iShares MSCI Japanese Index ETF (down 0.6% while index up 8.6%), iShares S&P/TOPIX 150 ETF (down 1.32% while index up 8.6%), and SPDE Russell/Nomura PRIME Japan ETF (down 0.78% while index up 6.6%).
The reason is that the ETFs themselves are traded continuously, often at a premium or discount to the net asset value of the underlying index, which is usually computed at the end of each local trading day. So while premiums and discounts tend to revert to the underlying index price in large, liquid markets like the Japanese stock market, investors who bought at a premium may still have a loss.
Mutual fund investors do not experience tracking problems. Unlike ETFs, mutual funds are valued based on the net asset value of the holdings of the fund, which is computed once a day after the market closes. Thus, there is no premiums or discount to the NAV.
Mutual funds are considered long-term investments. ETFs are often used as short-term trading vehicles. Many mutual funds protect their long-term shareholders by imposing a redemption fee for shareholders who sell within a certain time after purchasing the fund.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in ETF matters. For further information, please contact us.