ETF investors may notice two types of tracking errors: premium and discount. If a fund is priced above its net asset value, it is said to be trading at a premium. Oppositely, if the fund is priced below its net asset value, it is said to be trading at a discount. Potential investors should look for premiums as it indirectly eats away at potential gains. [Five Things You Need to Know About Trading ETFs]
Typically, if a premium or discount occurs, a market maker, or Authorized Participant, will use the opportunity to arbitrage the difference away, pocketing a quick profit and helping to return the ETF price closer to its NAV. [Three Things to Remember About ETF Premiums and Discounts]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.