GYLD's Drop: A Real ETF Pricing Error

ETF.com

 

Take a look at what happened to the ArrowShares Dow Jones Global Yield ETF (GYLD) yesterday.

GYLD is an interesting, well-run fund from a smart and focused startup ETF provider. The fund is well established in the market, with $84 million in assets. It has decent trading volume of nearly 50,000 shares per day; tracks its index well; and provides interesting, diversified exposure to five high-yielding segments of the market:

  • Global sovereign debt
  • Global equity
  • Global real estate
  • Global alternative
  • Global corporate debt

 

Its 30-day SEC yield is a healthy 5.77 percent.

In other words, it’s a good ETF.

And yet, for the first 90 minutes of trading on Monday, June 24, GYLD traded terribly.

The fund opened down about 2 percent on the day, on par with the broader market. Then, things went crazy. A handful of market orders—small lots of 300 shares, 500 shares, 135 shares—walked the price down to the point where GYLD was off nearly 10 percent. The S'P 500, at the time, was down “just” over 2 percent.

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GYLD Premium/Discount

As the equity markets stabilized, so did GYLD. It traded more or less flat for the better part of an hour, and then, in less than 10 minutes, rebounded more than 6 percent. It eventually ended the day flat.

This was ETF Mispricing 101. During the dip, GYLD traded at a real and substantial discount to its underlying value. Anyone who sold at the bottom got ripped off, and anyone who bought was happy as a clam.

How do you make sure you’re on the right side of that trade?

The answer is not to rely on the indicative net asset value (iNAV). More than 60 percent of GYLD’s holding are international, and as I wrote yesterday , you can’t rely on iNAVs for funds holding international securities. They’re meaningless.

Instead, you have to be a little smarter. We started looking into GYLD’s pricing shortly after 10 a.m. Eastern time, as it was one of the biggest negative movers on the market. Its big move seemed fishy; GYLD typically has a low beta to the market, so you don’t expect it to be leading the charge downward.

Our fears were confirmed when we compared GYLD’s move with those of similar funds.

 

 

The Guggenheim Multi-Asset Income ETF (CVY) was one proxy. It doesn’t have the same portfolio as GYLD, but it’s in the same ballpark, and as you can see, it did not in any way follow GYLD’s pattern. The First Trust Multi-Asset Diversified Income ETF (MDIV) was another fund we looked at, and it sided with CVY as well.

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GYLD vs CVY

Did one of GYLD’s individual holdings blow up? That couldn’t be the reason. The portfolio is not especially concentrated—it holds 150 securities—so no single blowup could account for the 10 percent move. Something was up.

At this point, if I were a trader, I would have bought GYLD. The only rational explanation was irrational pricing. Eventually, the market woke up to this reality and its price snapped back in line.

Why did GYLD trade down so far? The truth is, we don’t know. GYLD gets little attention from market makers—occasionally Knight or UBS shows up on the tape, but for the most part, it’s an ETF that changes hands between traders. Yesterday was no different, and the markets were volatile. Put them together and you have a bit of a perfect storm.

Takeaways

What are the takeaways from situations like GYLD?

First, never use market orders; that’s what started the mess in the first place.

Second, before you buy or sell an ETF, check to see if it’s making an outsized move. If it is, it pays to cross-check it against competing funds to make sure it makes sense.

Third and finally, don’t let this scare you.

GYLD is a well-run fund, and if you bought it for the long haul—and know how to trade—nothing bad is going to come to you. Consider this:Later in the day, a massive trade for more than 150,000 shares of GYLD priced spot-on in the market; you can’t even see it in the chart. It didn’t move the share price up or down. That was a trader who knew what she was doing.

As always, a little education can go a long way. Without it, it’s a long way down.


At the time this article was written, the author held no positions in the securities mentioned. Contact Matt Hougan at mhougan@indexuniverse.com .

 

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