My bolds my comments in blue
One of the most important factors in determining what is a fair price at which to trade an ETF is the extent to which the ETF deviates from its NAV. While the arbitrage described above suggests that this should theoretically never happen, in the real world—and for a variety of reasons—it does.
Asymmetry And Arbitrage Channels In ETF TradingAsymmetry in the arbitrage process typically occurs when the bid-offer spread for the underlying constituents is wider than the bid offer spread for the ETF itself. When this condition exists, the ETF often fluctuates between prices that are bound by the arbitrage bands: APs are unable to directly arbitrage the ETF within this band, since the cost of assembling the underlying basket of securities is higher than the bid/ask spread of the ETF itself. Understanding when and where this can happen is important for those trading ETFs, because when there is asymmetry in the arbitrage market for a given ETF, large buy orders will have a different level of impact on the ETF market than large sell orders.
For example, in December 2009, IWM had an average bid/ask spread of $0.010 per share. During the same period, the underlying basket of securities in IWM had a combined average bid/ask spread of $0.122 per share. This twelvefold difference creates a vast amount of space for IWM to trade within before arbitrage becomes profitable.
In other words if Mr, Hougan would look carefully at the Bloomberg screen he writes about it : if one were to execute market orders for the underlying securities and market orders for the etf, the etf buyer would wind up better off. In fact if the etf was bought at the offer and the stocks sold there would be a theoretical arbitrage for the etf buyer. Add in the commissions and the higher likelihood for slippage and difficulty of execution for the underlying stocks and you get an idea of the advantages of the etf
This would be even more the case for corporate bonds or high yields. The bid offer for the underlying bonds would vary among dealers and be very difficult to execute. Calculating an NAV that represents the actual prices the securities in the index could be bought or sold yet the HYG high yield etf and the lqd corporate bond etf often trade with bid ask spreads of $.01.
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Investors should be able to drive most trades in ETFs within the channel suggested by the NAV bid/ask spread. But within that channel, large buy and sell orders can and will drive the price of the ETF toward the top or the bottom of the channel.