The price is right.
ETF liquidity is also enhanced via the unique arbitrage opportunities specific to ETFs. The arbitrage process, which
helps keep ETF spreads tight, works like this: Authorized
participants continuously monitor the market and determine
when and if the value (or price) of the ETF differs from the
value of the ETF’s underlying securities. If these two
values start to diverge, an authorized participant will seek
to arbitrage the difference between the ETF’s price and the
value of the underlying stocks.
In other words, if the price
of the underlying stocks is below the price of the ETF, the
authorized participant will buy the underlying securities and
convert them to shares in the ETF while selling the ETF in
the open market. If the underlying stocks are priced above
the ETF, the reverse will occur. This arbitrage process, and
the competition between the authorized participants to
spot price misalignments, actually serves to keep ETF prices
aligned with their real underlying values and keep the
bid/ask spread tight.
Arbitrage Provides Tight ETF Price Spreads
ETFs are subject to risks similar to those of stocks and may not be suitable for
all investors. Investment returns and principal value will fluctuate so that when
shares are redeemed, they may be worth more or less than original cost.
Securities are not guaranteed by any bank, are not insured by the FDIC or any
other agency, and involve investment risks, including the possible loss of the principal
amount invested.
RydexShares are distributed by Rydex Distributors, Inc., an affiliate of Rydex Investments.
For more complete information regarding Rydex funds, call 800.820.0888 or click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund's prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.
Key Points to Remember
An ETF’s liquidity is dependent on the underlying holdings’ liquidity
The creation/redemption process helps facilitate ETF liquidity
Arbitrage opportunities help keep ETF bid/ask spreads tight
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An ETF’s liquidity is