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How the Pricing of an ETF Works - Basics of Stock Market Investing (WHAT DETERMINES ETF SHARE PRICE)
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- เผยแพร่เมื่อ 18 ส.ค. 2024
- ETFs have become incredibly popular over the last few years because they come with nice benefits such as #Diversification, low costs, high liquidity, accessibility and transparency.
However, if you are the average investor, they can be a bit of a mystery: You aren’t exactly sure how they work and why the share price between ETFs is so different. Why do #ETFs that track the same #Index, like the S&P 500, have a different #ETF share price?
Don’t worry, today is the day to find that out!
This video explains how the pricing of ETFs work in a very simple way.
⏰⏰ Timecodes ⏰⏰
0:00 Intro
1:03 Fund Explained
3:25 ETF Share Price
5:53 Creation and Redemption
10:09 Benefits of Creation and Redemption
11:30 Summary
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DISCLAIMER: This video is for educational purposes only and merely cites my own personal opinion. In order to make the best financial decision that suits your own needs, you must conduct your own thorough research and seek the advice of a licensed financial advisor if necessary.
#IndexInvesting #ETFinvesting #PassiveInvesting #IndexFunds #InvestingForBeginners
#FinancialEducation #PersonalFinance #StockMarket #StockMarketTips #InvestingTips #StockMarketInvesting
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By far the most straightforward and at the same time accurate explanation of the creation and redemption process I have found on the net. Great job!!
Hi Dénes! Thank you very much for your feedback🙏 Comments like this truly motivate me🙃
I looked all over for an explanation like this too. Great info.
wow ! simply wow !!! you broke down a complicated topic into something i could understand easily. i was trying to understand the etf pricing concept for so long and finally you taught me. Thank you for the great work...
Hey Satheesh! Thank you so much for this wonderful comment. Please also check out my latest videos, I hope they can add value as well 💪
This is the most complete and clear explanation i've eveer seen about NAV and all its related things.I've been watching videos and reading books (and buying ETF) for almost 3 years now but i was still missing some clearness . Thank you very much!
There are a lot of strategies to make tongue-wetting profit that the average joes don't know. . Personally, the financial-market for me seems the only way forward with my long time horizon (accrued roughly $457k in gains since Mid 2021 ) but if you don’t have that fortune of time it’s a tough market out there almost nowhere feels safe!
If you’ve got patience I believe it’s a great time to invest… I’m no expert but as Warren buffet said he’s seen this happen a number of times throughout his life
@@jesbensommichael8397 I've known I had wanted to start investing for a few months but just haven't been brave enough to start due to the market so far this year. I have $60k I want to transfer into an S&S ISA but it's hard to bite the bullet and do it. $457 is a huge milestone, Please what's your strategy? I will love to have an insight
@@georgerobinson2021 I began with a fiduciary portfolio advisor by the name Margeret Ann Warnken. She’s verifiable and her works ethics is in accordance with the US investment act of 1940. Her approach is transparent allowing total ownership and control over my portfolio with fees very reasonable in comparison with my investment-income. Also, She covers things like investment insurance, making sure retirement is well funded, Go over tax advantages , ways to have a volatility buffer for investment risk. many things like that.
@@jesbensommichael8397 Word of the day: fiduciary. do not talk to anyone who is not a fiduciary to you, who explains everything.
@@georgerobinson2021 Margeret Ann Warnken really seems to know her stuff. I looked her up on the web using her full name and found her page, read through her resume, educational background, and qualifications and it was really impressive. She is a fiduciary who will act in my best interest. So, I'll book a session with her
I watched 5-6 videos, but the ETF redemption, creation and arbitrage process is just explained flawlessly in this video!
Hey Amogh! Whoaa thank you so much for this wonderful comment. Incredibly happy to hear that you could get value out of it. Please also consider subscribing and checking out my other videos🙏
Oh boy!! its the best ever explanation of ETFs!!! Simply superb & outstanding!
Those who don't agree, try understanding it (How price of ETF works) from other sources including other highly subscribed TH-cam channels and come back. I am sure this will out-wight all others combined. Happened with me, too. After wondering for a good deal of time for question - how price of ETF is decided when the ETF price is derived from basket (at creation time) + demand-supply (exchange on secondary market, ever-going activity), found this video which answered it all!
Needless to say, subscribed! Thank you for making this video!
And congratulations for making such a good quality content! God bless!
Wow, Amit! Thank you so much for watching the video and leaving this wonderful feedback. This means a lot to me. Made my day🙏
Answered my exact query relating to the demand/supply pricing as well as the underlying asset valuation! Excellent
One of the best videos explaining how ETF work in-depth. Very nice, thank you.
Hey Mohammad! Thank you so much for this feedback - this motivates me a lot💪
Wow. I was waiting for a TH-camr to explain the ETF calculation briefly. Now I got it 👍🏻👍🏻
Hey Ram! Whoaa thank you so much for this wonderful feedback. Glad to hear you could get value out of it 🙌
Thank you for your videos. Great explanations and straightforward. Subscribed and supporting
Very helpful and clear
Hey Mike G! Thank you so much for your feedback 🙏
very good explanation, thank you
Hey viviz mon! Thank you so much for watching the video and your feedback. Really appreciate it 🙏
At last !!! One clear explanation on the nav and market price that i've been looking for. Thank you for that.
Hey Jc! Thank you so much for watching the video. Glad to hear that you could get value out of it💪
Great analysis thanks
Hey Ebrahim. Thanks for also watching some of my older content. Absolutely amazing to see💪
Great content, as always! Very well explained and makes finance simple.
Hey Tara, thank you so much for your feedback and continued support🙏
Excellent video, thanks!
Hey Jeremy, thank you so much for your wonderful words. I release new videos every Sunday. Consider subscribing if you wanna see more 🙃🙌
Amazing job !
Hey RED! Thanks for your feedback. Really glad to hear that you could get value out of it🙏
Nicely explained!
Thank you so much for your feedback, this is always super valuable. I release videos like this on a weekly basis. If you would like to see more of this, then please go ahead and subscribe 🙂🙌
Great video !
Hey Mahi's Expedition! Thanks for watching the video and leaving this wonderful comment. Glad to hear that you could get value out of it 🙌
thank you so much for helping me understanding how ETF work behind the scene
Great introduction, thanks.
Hey Benas! Thank you so much for watching the video and your wonderful feedback🙌
This is an absolutely brilliant explanation of ETF pricing!! Thank you very much, FU.
Don't give up on creating content. You're very good :)
Hey Nate Dogg! Thanks for watching the video and this beautiful comment. Much appreciated🙏
Amazing just amazing every question that popped in my mind was answered in the next sentence kudos to you man
Hey Paritosh! Wow, thank you so much for this wonderful feedback. So glad to hear that you could get value out of this video🤜 🤛
Amazing how you explained all the details behind the scenes in an easy manner! Thanks!
Hey Thales! Glad to hear that you could get value out of the video. Thanks for watching and leaving this wonderful feedback🙏
Here before you start your parabolic growth on youtube. Great content, keep it up!! 😊👍
Hey Disposable Gadget! Thank you so much for your comment. That really warmed my heart ❤🙏
Best video on ETF
Thank you best explanation
Very good video, I think the flow chart looks slightly different in Australia but a good starting point. I like (I think thumbed uped all of them) all your technical explanation video's (like the SPAC one). Keep them up, will share these when they are relavent.
Hey David, thank you so much for your comment and greetings to Australia👋 That's amazing to hear that you like the technical videos. There will be much more in the coming weeks and months. Thanks for sharing - helps this channel MASSIVELY 🙌
Great video ! Thank you so much !
I just have one question: if we consider the particular case where the ETF shares are at premium (more worthy than the securities), what's the benefit for the ETF Provider to exchange Securities against new ETFs? Is the provider obliged to do so? Can it refuse new ETF creation?
Thanks !!
Really good video. You answered all my questions. Bravo!
Hey Sam! Thanks for watching the video. Glad it was helpful! 💪
Thanks that is helpful
Hey Abdulrahman! Thank you so much for watching the video. Glad that the video was helpful!🙏
Best explanation of ETF pricing! Thank you.
Hey Sagar, thank you so much for that feedback! Also consider checking out my other videos and subscribing of course 🙏
Best explanation on this topic on TH-cam
Thank you so much for this wonderful feedback ❤ I release weekly videos on personal finance. So please consider subscribing 🙌🙃
Man u rock🙏🏼 excellent
Thank you so much for this wonderful comment - it means a lot🙏
Thank you!
great video.
Hey Sajid! Thanks for watching the video. Great to hear that you could get value out of it🙏
Thanks a lot man
Nice explanation
Hey chandra bhatt! Thank you so much for these kind words - this means a lot to me🤗 Also, check out my latest videos🙌
Amazing video man! Exactly the info I was looking for 🎉
Wow this was an amazing and clear explanation, thank you!
Hey Senai! Thank you so much for watching the video and your feedback! Please also check out my more recent videos😊
This is a great material. In the redemption explanation, unclear why the ETF provider will ask AP to buy the underlying shares, wouldnt it be a sell underlying securities. The good news is that it is summarized correctly at the end of the video as "elimination" meaning selling.
Excellent video and explanation !
Hey Smartmoney Advice! Thank you so much for your feedback - this means a lot🙏
Best explanation I have come across. Thank you!
Hey Cherrelle! Thank you so much for watching the video. Very glad to hear that it could add value to you!🙏
Awesome! Great job man!
Hey Suraz! Thank you so much for watching and leaving this wonderful comment here!🙏
Amazing explanation! Thank you 🙏
Thank you so much for your feedback. Comments like this drive me 🤩🙌
9:57 because of the bull and bear icons, I know understand why they choose it. They way those animals stand makes their backs go up or down.
Hey Oebienoobie! I love when you have that moment of realisation😂 Thanks for watching the video!💪
Thx!
Hey Alfonso Ucha! Thank you so much for watching the video and leaving a comment🙌❤️ Also consider subscribing to this channel of course😊
Great explain. 1 question. Bank is holding the underlying shares of ETF, so when share companies declared dividend, bank received the dividend.
Please explain how this dividend is distributed to etf investor if etf is growth (not dividend option)
Great explanation, thank you!
Indeed great info and other comments reflect this. One video would be nice the regulation of these etfs and the security of these etfs. Like UCITS etfs are certainly regulated.
Hey Ianau! Thanks first of all for watching the video and your comment. I'll take this on my list of ideas for new videos - that's super valuable feedback👌
Great explanation!
I did not understand. I am still a newbie on stock market. Thanks anyways ...... Could you please suggest any book on this subject? Great job
Hey Francisco! Thank you so much for watching the video and leaving a comment. That's great that you are a newbie in the stock market. Getting started is the hardest part. I would suggest you watch these 2 beginners video on how the stock market works and how ETFs work:
- th-cam.com/video/PFqTcvEPz5c/w-d-xo.html
- th-cam.com/video/41vh_d2_PyI/w-d-xo.html
very informative - wish it also contained a transcript
Hey Mary! Thank you so much for your feedback. There should be a transcript. Can you see it when you click on "CC" at the bottom of the video screen?
GREAT VIDEO! how would this work for a fixed income ETF?
Hey Wenson! Thank you so much for your comment. The process is fairly similar when it comes to fixed income ETFs. There is a good read from State Street on this topic: www.ssga.com/library-content/story/general/etf/emea/spdr-fixed-income-etf-mechanics.pdf
And of course: Consider subscribing to this channel if you want to see more useful videos💪
Interesting and simple explanations. How can one become an AP to take advantage of the arbitrage trades?
Hey QTQY! Thank you very much for watching the video and your feedback🙌 There are some high-frequency traders that take advantage of mispricings in the market. But to be very honest with you: That's not my field of expertise as I'm fully focused on long-term investment strategies. If you're interested in that too, then subscribe and check out my other videos😃
I wanna know how does underlying holding affects the etf. Like arkk
If APs have to step in and buy stocks to form new ETF units (if none exist on the secondary market at sufficient volume), at what price should you offer to buy the ETF for? Will Market Markers ever sell at the iNAV? (even if the secondary price is more than the iNAV)
Great explanation and thank you! One question: in 10:54 do you mean passively managed ETFs can keep less cash than actively managed ETFs and mutual funds? Or are you comparing ETFs as a whole with mutual funds?
Hey yuyu! Thanks first of all for your feedback - that really means a lot to me🙌 Thanks also for your excellent question. I was more so referring to keeping cash in general - regardless of the fund structure. Even an active managed ETF provider could park cash temporarily to wait for a good buying opportunity. The "parking time" of that cash (as it's not generating any substantial return) is costing the investment firm return - regardless if it's an actively managed ETF or mutual fund.
At 6:45, assume the current price of ETF is $25.00, more buyers than sellers, and I am a retail buyer, what limit price should I set to purchase?
I am guessing at $25.00 the AP will not do the Creation.
At too high above $25.00 I stand to earn lesser. I sometimes see the ASK price is at-least 1% above the BID price. What are the considerations for a buyer when setting a Limit Buy price? Thanks
Hey ufoubo! Thanks for your comment. That's a very good question - really! But I usually don't try to look at ETF purchases on such a granular level. I usually buy them through a savings plan via dollar-cost averaging. If you go for any of the well-known brokers, the bid-ask spread shouldn't be too bad. But I will make a dedicated video on the hidden costs of trading apps where the bid-ask spread is one of them. So stay tuned✌️
Right now the Spot ETF's are only allocating 1-3% toward Bitcoin. Later they might offer 4,5 or even 10%. So to me it doesn't make sense to invest in such a low allocation in Bitcoin. Get it from a reputable exchange.
Hi, in Romania the only available ETF which follows the BET index has a TER of.. 1.51%! In this video, you mention that even active funds have a TER of 0.78%. How do you explain such a difference?
Thanks for sharing that great video!!!!, just 1 question, if a expense ratio of an etf is .2%, is that .2% divided by 12 months? Meaning that .2% is an annual fee.... is that right?
Hi Jesus! Thank you very much first of all for your question - really good one! Typically, the expense ratio of ETFs or index funds is the annual fee unless it's explicitly stated differently. Let me know if you have any other question. Also, consider subscribing - if you haven't already done so - for more videos like this :-)
So in theory an etf provider can create new shares and devaluate existing price of an etf share?
If the price doesn't matte and have similar return, does it mean better buy lower price one, so I can own more stocks instead of purchasing the higher price one?
Hey Trace.L. Thanks for watching the video. The price of 1 share is not really the determining factor. You can buy 10 shares that are priced $1 or 1 share that is priced $10. What matters is your total investment amount and how much total return (capital appreciation + dividends) that invested money gives you over time.
@@fu-academy thanks let me think about it.
Great explanation. You got a subscriber from Brazil :)
One question from a beginner. If an ETF Price to Book ratio is 4 (for example: VOO), does it mean that if you buy the amount of stocks with the exactly % of the ETF, it would cost 4 times cheaper?
Hey Fala Investidor! Greetings to Brazil! So happy to hear that you are watching and enjoying my video💪
This is a very good question. The PB ratio of an ETF is the weighted average of the PB ratios of all the stocks in that ETF. It doesn't represent a discount or premium of an ETF compared to the underlying assets. Because of the creation/redemption process, you usually only have a tiny tracking error. So if the VOO has a PB ratio of 4x, then the underlying assets / index (in this case the S&P 500) should have an almost identical PB ratio of 4x. I hope this answers your question? Let me know if anything is unclear 🙃
@@fu-academy Thank you for your answer. It helped a lot! Apparrently what I was thinking is the NAV, that's how you evaluate if you have discount or premium in a ETF compared to its assets right?
Hey Fala Investidor! Yes, exactly! If the price of an ETF is trading above NAV, then the ETF is trading at a “premium.” If the price is trading below NAV, then the ETF is trading at a “discount.” But in general, ETFs trade close to their fair value, and premiums or discounts are only short-lived. I hope this helps 🤜🤛
@@fu-academy helped a loot! Thank you!!
Always💪
If a ETF were to drop massively in price would this also cause the stocks within the ETF to also drop in value?
This is such an excellent question and shows your good understanding of this topic. This is exactly the point that Michael Burry (from the movie "The Big Short") made. ETFs, in theory, can cause a liquidity risk for companies that are included in an ETF in an event where ETF prices would drop dramatically. This is not so much of a problem for larger companies since they are so frequently traded outside of ETF capital flows, but could be a problem for smaller companies that are not frequently traded and receive all these massive capital flows from ETFs. On the other side, most ETF providers don't even bother buying the smallest companies in an index and do "sampling" instead. So, there is not a clear yes or no answer here. However, I'm literally working on a video for this topic "ETF Bubble in 2021?" and this will be released soon. This video will explain the whole subject and analyse the risks for normal investors like you and me. Feel free to subscribe to my channel so that you won't miss the video!!! :-)
@@fu-academy you have no idea how hard I have been searching for this answer thank you! now lets take this concept one step further lets say TZA goes through and does a reverse stock split of lets say 8:1 causing the price of the shares to go up while decreasing the shares available in that ETF would the company's that make up that ETF be artificially raised by this action without diluting the share for those who are actually holding shares in the company i.e. any company in the Russel 2000 index that is apart of TZA
@@NewWorldDevL First things first: I would be very careful with leveraged or inverse ETFs as they can cost you a lot of money if you don't get the market timing right - and no one can time the market. Now, stock splits or in this case reverse stock splits don't have an impact on the company's valuation (market cap). Only the number of shares changes, i.e. the share price. If Company A has 1m shares and a market cap of $100m, then the share price will be $100. If it does a 2:1 stock split, the number of shares will go up to 2m. The share price will go down to $50, but the market cap is still $100m. The same methodology applies to reverse stock splits.
@@fu-academy but if the ETF does a reverse stock split the number of shares changes and so does the price to correlate like in your example of 2:1 but the number of shares of each company remains the same for example let's say ETF X has 100 shares of Company X inside it but ETF X has 100 shares that ppl could buy with the value of ETF X being 100$ they do a reverse stock split of 2:1 ETF X now is worth 200$ with 50 shares available for purchase but ETF X still contains 100 shares of Company X valued at a higher price while contained in the ETF if rebalanceing were to take place wouldn't this theoretically drive up the price of Company X? I'm so sorry if this makes no sense I'm unironicly retarded.
@@NewWorldDevL Thank you very much for your question. I think I understand your question a bit better now.
I wouldn’t look at it from a share price perspective but from the underlying value perspective.
A reverse stock split, in theory, doesn’t affect the underlying value of an asset.
It’s also not part of the traditional creation redemption process. The underlying value has not changed due to increased / decreased demand by investors. They still remain in balance and the market maker doesn’t have to use arbitrage to calibrate the values.
(Reverse) splitting a stock just means that you alter the number of shares without affecting the underlying value of both, the ETF share and the company included in the ETF.
I hope this makes sense.
here after the btc approval
FU too!
So basically ETFs are a scam, since they can be created at whim and the price depends on the supply demand (not only the value of the participating stocks).
FU stands for Financial Understanding? Lol
Hey Solenya! Of course, it means exactly that and nothing else😁😁
FU!
You earned a subscriber.. Keep up the good work.
Also would like to hear your views on more specific and focused ETF like GIGO, thanks
Mahmood, thank you so much for these wonderful words! Feedback like this motivates me to the max🙃 I am current working on a video in which I will suggest ETFs 🙌🙏