Sunday marked the beginning of the 2013 Lunar New Year, and like any other New Year celebration, businesses will go dark and capital markets will close in the countries where the holiday is celebrated.

Because of this, many international ETFs will be affected because some of their underlying securities may not be available to trade throughout the multi-day holiday.

However, during these extended underlying exchange closures, the US market will remain open and US-domiciled ETFs – even the ones that provide international exposures – will continue to trade.

So how do foreign market closures affect these ETFs?

First, it’s important to understand why this matters.  ETFs can be created and redeemed in large quantities throughout the day by market players called authorized participants (APs).  They do so by delivering a basket of the underlying securities to the ETF provider in exchange for a basket of the ETF shares, or vice versa. [Meet the ETF Market Makers]

When the underlying securities aren’t available to buy or sell – say, because the market on which they trade is closed – the APs need to make an educated guess about where these securities will be trading once the exchange opens again. You can see how this situation isn’t limited to holiday closures like the Lunar New Year.

Every day, authorized participants in the US have to make these educated guesses in order to facilitate creations and redemptions in US-domiciled international ETFs, simply because the underlying securities trade on an exchange that closed hours ago due to time zone differences.  For example, the iShares MSCI EAFE ETF (NYSEArca: EFA) is comprised of securities that trade on stock exchanges in Asia, Australia and Europe, but EFA itself trades on the US stock market during US market hours.

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