Exchange traded funds and closed-end funds are often grouped together, although ETFs don’t exhibit the premiums and discounts seen in closed-end funds.

Why is that?

The answer is the so-called arbitrage mechanism of ETFs. A premium or discount occurs when the price of an ETF share moves away from the net asset value (NAV) of the underlying holdings.

Investors buy and sell exchange-listed ETFs on the secondary market. If there is strong demand for an ETF, a premium to NAV may arise.

Enter the ETF “authorized participants.” These are typically broker/dealers that have the ability to create and redeem large blocks of shares with the ETF portfolio manager.

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