We’re not sure what to make of this, and perhaps the data is misleading. But there have been some very strange things going on in the world of NAV/closing price deviations at the United States Natural Gas (UNG) ETF of late.
Courtesy of Morningstar, an investment research provider, here is the extraordinary closing price/NAV deviation from Monday, 11th May:
Meanwhile, this was the picture on May 12th:
And this was the picture on May 13th, as per data from the UNG itself:
As Morningstar highlight in this article, the whole point of the ETF construct is that market arbitrage forces close out major deviations between market prices and NAV. That is why investing in ETFs makes sense. The funds’ listed units, trading like shares, in theory always end up tracking the performance of the funds’ underlying assets. While deviations do occur, they tend to be small and temporary in nature on account of the arbitrage mechanism at play.
Financial crises, of course, do have a funny effect on financial products which in theory work perfectly.
On this note, liquidity issues stemming from the October 2008 crisis saw some ETFs, especially fixed-income based ones, encounter a brief spell of increased deviation between market prices and NAVs. The case was also true for some commodity funds.
In most cases, however, these deviations have now reverted back to their historical norms. And while norms do depend on the type of funds in question, on average it would be fair to say deviations shouldn’t fluctuate much beyond 1 per cent in most products.
However, to see deviations of beyond 4 per cent in the current market, as was the case with the UNG on Monday, 11th May, is simply put, extremely unusual. To illustrate the point, take a look at the following charts tracking the average deviation between the UNG’s closing prices and NAV on a monthly basis since formation of the fund (data courtesy of Morningstar):
We appreciate these are monthly averages, however, just to contextualise the Monday move, here it is when compared to the historical monthly trend (chart altered by FT Alphaville):
Curiouser and curiouser.
Related links:
The curious case of ETF NAV deviations - FT Alphaville
United States Oil Fund, redux – FT Alphaville