ETF pricing, execution, and tracking

While ETFs are as simple to invest in as stocks, there are a few differences. It’s important that ETF investors understand how ETF shares are priced and traded—particularly during times of great market volatility. The answers to the following questions may help you better understand how ETF pricing works.

How are ETFs valued?
There are several ways to value an ETF: its market price, IIV and NAV.

To understand the relationship between these values, it helps to remember that ETFs trade throughout the day on the open market like a stock. All ETFs therefore have a market price—the price at which the most recent trade was made, which is determined by supply and demand. Note that the market, and not ProShares, determines the market price of ProShares ETFs.

The IIV (intraday indicative value) is a reference value to be used in conjunction with other ETF market information. The IIV (also referred to as “underlying trading value” or “indicative optimized portfolio value”) is intended to approximate the value of the holdings in the portfolio during the trading day. For all ProShares, IIV is calculated and disseminated by the American Stock Exchange every 15 seconds.

Finally, an NAV (net asset value) is the fund’s total assets less any liabilities divided by shares outstanding (just like a mutual fund). ProShares NAVs are calculated using prices at the equity market close, usually 4:00 p.m. ET. Note that an ETF’s market and IIV prices are typically near its NAV, but that these values may not be identical (see explanation below).

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Why does the NAV differ from the closing market price?
Investors in any ETF, including ProShares, should be aware of potential differences between daily net asset value (NAV) and closing price. ProShares NAVs are calculated using prices when equity markets close, usually 4:00 p.m. ET. However, like many ETFs, ProShares trade on their respective exchanges for an additional 15 minutes, usually 4:15 p.m. ET, when the equity futures markets close.

The closing price of any ProShares, which is the recorded price of the last trade, can occur before or after market close (4:00 p.m.) when the NAV is calculated. Therefore, there may be a difference on any given day between a ProShares NAV and its closing price.

Investors should note that each ProShare is designed to track the closing market value of the index underlying its benchmark.

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Who is responsible for how my ETF trades are executed?
Your trading desk, your broker, or whomever you rely on to trade ETFs is responsible for your trade execution. Note that ProShares does not act as a broker, and therefore can’t control the execution of your ETF trades. ETF prices are determined by supply and demand in the marketplace.

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How should I judge whether a ProShares ETF is tracking to its benchmark?
The only way to judge how well a ProShares ETF is tracking to its index is to calculate the percentage change in its NAV from one trading day to the next business day's NAV. Comparing this percentage change to the performance of its underlying index over the same time frame will determine how well the ETF tracked.

A ProShares ETF at times may not seem to track to its benchmark over periods longer than one day largely because of index volatility and its effect on fund compounding. (See our more detailed explanation, Understanding ProShares' Long-Term Performance).

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Is there a particular time of day when trade execution is most problematic?
Execution can be more complicated at the start and the end of the trading day, when there may be larger spreads between an ETF’s market price and the price at which your trade is executed.

ETFs sometimes begin trading several minutes after the exchange opens. Prices quoted during this interim may change rapidly when trading actually begins.

While equity markets generally close at 4:00 p.m. ET, trading in ProShares ETFs can continue for an additional 15 minutes, when the equity futures markets close. This later closing time allows index derivatives to balance based the close of their underlying securities. Liquidity can be tighter during this 15-minute period, and there may be greater fluctuations in market prices as a result.

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What can I do to improve the execution of my ETF trades?
ProShares is not a broker and therefore can’t control your trade execution. But we can offer these suggestions for improving ETF trade execution, which may be especially useful in times of greater market volatility:

  • Check with your trading desk or broker before you place your order, to ensure that you have up-to-date bid-ask information.

    Why? Your IIV or market price quotes may be delayed by up to 20 minutes, depending on the quoting service you use.

  • Another way to increase the likelihood that you’ll get the price you want: use limit orders instead of market orders. Unlike market orders, with limit orders you avoid executing at a price that’s significantly different from what you expected. Market orders don’t allow you to control your purchase or sale price.

    (With a limit order, you specify your purchase or sale price—buy limit orders can be executed only at the limit price or lower, and sell limit orders can be executed only at the limit price or higher . Therefore, if the market does not reach the limit price, the order will not be filled.)

  • Before placing an order at the beginning of the day, make sure the ETF has started to trade.

    Although an exchange may officially open at 9:30 a.m. ET, not every issue opens immediately. Some issues may begin trading as late as 9:45 a.m. ET. Prices quoted during this in-between time may rapidly change when trading actually begins. Alternatively, consider waiting until 9:45 a.m. ET before placing your order, particularly a market order.

  • Be aware of specific trading issues when placing orders for ProShares at the beginning and end of the trading day. Click here to learn more.

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