In a perfect world, exchange traded funds (ETFs) would track their benchmark indexes flawlessly and never trade at a discount or premium to the net asset value of their underlying shares.
ETFs aren’t priced like mutual funds, says Matt Krantz for USA Today. They hold a basket of securities, and investors can trade them as they wish, just like stocks. This trading moves the price, and often, that price is in line with the value of the underlying holdings.
If the price of an ETF gets out of line, institutions can trade them or create units, bringing the price back to where it should be. In general, this constant buying and selling of ETFs keeps their value close to the actual value of the stocks that it owns. [Risks and Rewards of ETFs.]
But sometimes, problems occur.