- Published on
TIL: Index ETF Intraday Pricing
- Authors
- Name
- Teddy Xinyuan Chen
Update 10/11: it's arbitrage (crossing both spreads): https://www.nasdaq.com/articles/2024-interns-guide-etfs#:~:text=What%20keeps%20ETFs%20tracking%20NAV%3A%20Arbitrage
Authorized participants (APs) act as a force that keeps the price of the ETF aligned with underlying assets every 15s.
Table of Contents
The Questions
I've been wondering these questions about index ETFs for a long time:
in an index etf, the trading the etf and the trading of the underlying stocks affect the price of the etf independently, so how does the pricing of that etf work?
index etf spy, voo, splg all track sp500 index, and their intraday 5 min candle chart look exactly the same, despite being traded independently. how?
For background, $SPY, $VOO and $SPLG are all index ETFs that tracks one of the most important indexes, the S&P 500 index, which is a weighted sum of the 503 component stocks handpicked by S&P Global.
Lots of people's retirement savings are on $SPY and $VOO, which are passively managed by SPDR / State Street and Vanguard, respsectively.
I swing trade $SPLG (also by SPDR), it's less liquid that the other two but it has the ETF with lowest expense ratio and an acceptable volume.
The Charts
I was looking at the chart of $SPY/$SPX, the ratio of the price of the ETF to the value of the index, and it's kept at a constant value for years.
All time $SPX/$SPY ratio since 1993 - it's moving lower at a very slow rate, suggesting that the relative value of $SPY went up and that the index ETF is being traded at a premium.
And the intraday candlestick chart patterns of the 3 index ETFs are extremely similar:
5 min charts for July 28, 2024 | Yellow shades = pre market, blue shades = after hours, $SPX (upper left) is the index, all 3 others are ETFs tracking it | I do notice small discrepency in the lower right chart of $SPLG, where a gap up is displayed at 11:45 AM instead of stacked green candles like the other 3.
The Answers
https://www.investopedia.com/terms/i/indicative_net_asset_value.asp
https://www.fidelity.com/learning-center/investment-products/etf/etfs-inav
iNAV is the value calculated using underlying stock prices and their weights in the index, almost in "real time" - it's reported every 15s and APs are in effect and align the price in "real time" during market hours, not just one a day after market closes.
To effectively affect the index ETFs' prices for more than 15s when market's in session, you need to affect the prices of the underlying stocks, or adjust their weights in the index (both are not possible as an individual retail trader).
More Questions
- Maybe the synced candlestick charts are just result of arbitrage between the ETFs tracking the same index?
- Why is technical analysis working on a weighted sum of candlestick patterns, like $SPY? For example, if $SPY is going to cross the 200-day SMA from below, are bears going to go bullish on the underlying stocks to push it higher?
- Real time price adjustments are not done perfectly, obviously, see the charts above. So what exactly is being done to adjust the prices?
- Is SPY driving stocks, or are the components driving SPY? How does that look like on different timeframes? https://www.reddit.com/r/RealDayTrading/comments/rxot25/an_impossible_indicator/
- I noticed that in Aug 2024, SPY, VOO, SPLG are all traded at a premium of ~2.4%. That can't be a conincidence and I think that and the almost-identical intraday patterns are the results of high-frequency arbitrage.