That’s not anything to be worried about; the ETF is just engaged in price discovery.  When the Chinese markets open up later, you can bet its stocks will “catch up” with the ETF’s share price. We’ve seen this happen over and over again. In fact, that’s just what happened with the Emerging Markets ETF that the Financial Times mentioned.

For most international equity ETFs, NAV is an irrelevant statistic. You can’t buy it; you can’t sell it; and it has no bearing on the true value of the portfolio. International equity ETFs will always trade away from NAV, and that’s OK.

Fear No. 2: Bond ETFs Trading At A Discount To NAV
Actual Concern: Medium

A bigger concern comes with bond ETFs. Many of the same articles that mentioned worries about international equity ETFs also cast shadows on bond funds; here, they have some merit. For instance, Tom Lydon of ETF Trends notes that the iShares S&P National AMT-Free Municipal Bond Fund (MUB) traded at a 3.4 percent discount to its NAV on June 20. 

The problem with bond NAVs is different -- and in a way, more dangerous -- than the false concern with international equity NAVs.

Bonds do not trade like stocks. There is no central exchange for bonds, no way to look and see that bond X is worth $102.23. Instead, most bond deals are privately negotiated: The price you get for a bond depends on who you call, how much they want to buy, and how good your relationship is. 

To make matters more difficult, the bond market is notoriously illiquid. Many bonds don’t trade for days (or weeks/months/years) at a time.

Put those two together and you have a recipe for uncertainty. Since there is no one agreed-upon price for a bond, ETF issuers calculating NAVs at the end of the day have to essentially guess at the value of the bonds they hold. They do this by contracting with bond-pricing services -- typically large investment banks, data shops or consortiums that use a combination of reported sales, trading desk surveys and algorithms to “estimate” the value of each bond.

The general consensus in the market is that these pricing services, while valuable, become less accurate during times of market stress. When investors panic and liquidity dries up in the bond market, the pricing services tend to overestimate the “value” of a bond compared with what you would get if you actually tried to sell it. In other words, they will say that a bond is worth $100 when (in the midst of a market panic) the best actual bid to buy it might be $95.

If this sounds strange, think back to the depths of the housing crisis in 2008. Ask yourself: What was the fair value of your house at the depth of the crisis? Now, ask yourself: At what price would you have had to sell your house on a single day, say October 12, 2008?