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David Mann

Head of Capital Markets, Global Exchange-Traded Funds (ETFs), Franklin Templeton Investments

Given all the possible questions about the exchange-traded funds (ETF) ecosystem, the official closing price of an ETF is probably pretty far down the list. The closing price is the last price of the day, right? As it turns out, there was room for improvement on the way the official closing price is calculated and there is a new rule change that does that. David Mann, our head of Capital Markets, Global Exchange-Traded Funds (ETFs), explores this subject.

One of the main goals of this blog is to highlight problems and misconceptions within the ETF ecosystem and then offer explanations or even possible solutions. For example, recently I have focused on how sometimes an ETF’s volume doesn't tell the whole story. This becomes especially important when fund selection is driven by this metric.

Another metric that is used quite frequently is an ETF’s closing price. This price is used to determine the daily profit and loss (P&L) of an investment and can also be used for calculating an ETF’s volatility over a given timeframe. Once again, data calculated from an ETF’s closing price can sometimes drive investment decisions.

For ETFs with high volumes, we rarely have heard any concerns about potential problems with the closing price. Instead, most of the questions we have received on an ETF’s closing price have been about premiums and discounts for US-listed ETFs that hold underlying international securities. This is something we have discussed in this forum previously.

We also discussed premiums and discounts that can arise from ETFs that trade less frequently, which could cause the perception of a disconnect between the closing price of the ETF and the value of its underlying basket of securities. This disconnect can get exacerbated if the ETF does not trade for a couple of days.

Some good news to share! NYSE Arca took action and changed how closing prices are calculated. You can find the entire methodology here.

We really like this change. To give a high-level summary of its new methodology, for ETFs that have high volumes and trade throughout the day, the last-traded price will be used as the closing price, just as is done currently. However, for ETFs that do not trade as frequently, the closing price will be determined using the time-weighted mid-point of the bid/ask spread over the last five minutes of the trading day.

We think that is a much better approach! Prior to this change, the official closing price of an ETF was its last eligible trade, and on days with no trading, the previous day’s close would be used. Now, the official close will be based on the live markets that day, even if there was not any volume transacting on those markets. This should be a far more accurate reflection of the ETF’s price.

We applaud this change from NYSE Arca and look forward to working with all members of the ETF ecosystem to continue to improve the investor experience when trading ETFs.

David Mann’s comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

This information is intended for US residents only.

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WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETFs’ net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress. Brokerage commissions and ETF expenses will reduce returns.

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