ETF closing prices are a mess, and that’s fine

Simon BrownETF Blog, Latest

The above tweet is a perfect example of how exchange traded funds (ETF) closing prices are a mess – and usually wrong.

But first, let’s look at the fair value of an ETF

There is a market maker who is in the market on both the buy and sell side of the fair value, so there is always liquidity in the market around the fair value of an ETF. Therefore, historical volume is not a concern.

The fair value is mostly easy to calculate: It’s the index value plus any dividends received by the issuer but not yet paid, including interest received on those dividends less the issuer fees.

Fair value example

So say we have the Top40 index at 62,300 and the ETF fair value is R62.30. The issuer has a divider of 10x to reduce the price to a more ‘affordable’ level. Affordable is a misnomer, but as most brokers require us to buy a whole ETF (or share) it makes life easier for smaller investors.

Back to that R62.30 price. It’s currently late August and the issuer would have received a bunch of dividends since the last dividend payment for the quarter ending June. These dividends will also have accrued a little bit of interest as they sit in the issuer’s bank account.

Let’s make that dividend and interest 30c per ETF. So now the fair value is R62.60.

The issuer also takes their fees out of the dividend payment, also known as the total expense ratio (TER). Let’s say that is 0.1% a year or 0.025% a quarter, which gives us a little under 2c. If we take that out of the fair value we get R62.58.

So now we have an updated fair value. What’s next?

The market makers spread

With a fair value of R62.58, the market maker will be on either side of that value at say R62.48 and R62.68. So if you buy on the market from the market maker, you pay a little over fair value and selling to them you receive a little under fair value. This is income for the issuer to pay the market maker and JSE trading fees (and profits, of course).

So here’s the first problem: The index may be green today, but a seller sells to the market maker below fair value and so the ETF may be red, or only slightly green, while the index is looking much greener.

Enter the real mess: The closing

At 4.50 pm the JSE goes into closing auction. You can still enter buy and sell orders, but no orders are matched until 5pm when the system will match the price at which the largest volume trades. Lekker efficient for shares, but not for ETFs as the market maker is not in the market during the closing auction nor the actual close at 5 pm.

So instead the JSE uses a whole bunch of clever ways to try and determine the final closing price for the ETF when there was actually no 5pm closing trade.

This is based on the difference between buy and sell in the 10 or 15 minutes leading up to the closing auction starting, and any trades in the period before.

Now things can get really messy. Say the issuer spilt coffee on their laptop so they had no buy or sell orders in the market from 4pm. The closing price will be an absolute mess. Or maybe the market jumped (or collapsed) half a percent during that 10-minute auction, which will (again) result in a mess with the ETF closing price.

We’re still not done with potential issues

Another issue arises when I bought some of the ETFs in the closing auction, but from a seller (who is not the market maker) at a price well below or above fair value.

All of these scenarios mean we get a price that is not a fair reflection of fair value and as such, the closing prices recorded by the JSE for ETFs are an absolute mess and worthless.

But should we worry?

I know, we like to log on during the evening or weekend to see how our portfolio has done, and these messy closing prices make a mess of our portfolio values and the ETFs percentage moves.

But the next trading morning the market maker will be on either side of fair value and everything is rosy again.

So yes, your portfolio looks messy, but you can’t buy or sell when the market is closed, so it’s really not an issue. And remember, over the long term the ETF will largely deliver the return of the index it tracks.

Simon Brown

ETF blog


At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.