Salient to Investors:
Share prices for the 10 largest diversified emerging-market ETFs on average were 42.6 percent more volatile than their underlying indexes from May 22 to June 24, when Bernanke triggered the sell-off that sent emerging-market stocks to a 1-year low, while the 5 biggest emerging-market index mutual funds were only 4.8 percent more volatile than their indexes.
Todd Rosenbluth at S&P Capital IQ said this proves that you are not just buying a benchmark when you buy an ETF, but also the related costs, including volatility and the spread price and net asset values.
Jack Bogle at Vanguard says ETFs encourage investors to trade frequently, undermining the long-term investment philosophy of indexing – traitors to the cause of classic indexing,
The only difference between an index fund’s price and the per-share value of its underlying index will come from the manager’s inability to exactly replicate the index in the fund’s holdings.
Volatility is less of an issue for ETFs that track large and liquid markets and whose shares trade during the same hours as the underlying assets.
Dennis Hudachek at IndexUniverse said emerging-market ETFs and certain fixed-income ETFs, such as those that invest in munis, may also see increased relative volatility during periods of market stress because it’s too difficult to buy thousands of different bonds and the funds may not track the indexes exactly.
EPFR Global said emerging-market equity ETFs had $10.3 billion in redemptions in June, the most since it started tracking the data in 2001.
ETFs that track emerging stocks tend to suffer bigger price swings than their underlying indexes.
Rodney Comegys at Vanguard said these premiums/discounts have limited impact over longer periods since they typically revert to around zero.
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