The Premium-Discount Conundrum
   
Premium and discount trading in international ETFs is the result of a simple timing issue. Once an overseas market closes like, say Japan, the value of the underlying Japanese assets stay the same, while the U.S.-listed ETF keeps trading. That means that for most of the U.S. trading day, the U.S.-listed Japanese ETF is trading based on expectations of how the underlying market is going to perform the next day.

"As the day goes on, the net asset value (NAV) gets more and more stale," said David Garff, president of Walnut Creek, California-based Accuvest Global Advisors, which invests in a range of country ETFs.

A 1 percent or 2 percent premium or discount is not alarming on a typical trading day, but a surprise economic policy announcement or unforeseen event could make those premiums double or triple, analysts said.

When the Bank of Japan made a surprise announcement on Friday, Oct. 31, last year that it would be expanding its massive stimulus spending, the iShares MSCI Japan ETF spiked to a 6.8 percent premium on the following Monday, Nov. 3 - a day that Japanese markets were closed for a national holiday.

Playing, Or Paying The Price

Investors can take advantage of those price divergences by using discounts as opportunities to buy into markets they like anyway, Glovista Investments' Bhatt said. But unaware investors may get stuck paying a premium for an ETF without even understanding that they are doing so.

One afternoon last year, for example, Bank of America Merrill Lynch received an order for $1 million worth of shares of the iShares MSCI Japan ETF, at $12 a share––a price that included a 2 percent premium because investors were expecting Japanese shares to rise overnight.

Japanese stocks did rise but the ETF did not move up with it because that bump had already been priced in by U.S. buyers. "We had to explain that the ETF was projecting the premium already," said Sanjay Chablaney, director of ETF trading at BofA, at a conference.

U.S. investors also have to consider currency exchange rates given the stronger dollar, which can cut into total returns generated in weaker local currencies abroad.

Investors have been turning to currency hedged ETFs, which strip out the effect of a region's currency on the performance of a given fund.