@article{Premiums2001,
  title = {Premiums on {{Exchange-Traded Funds}}: {{Should Traders Be Concerned}}?},
  author = {{J. Christopher Hughen}},
  year = 2001,
  journal = {Investment Guide},
  pages = {1--5},
  abstract = {The high turnover of ETF shares indicates that many short-term traders find this investment vehicle attractive. Are these investors trading fund shares at prices that reflect the value of the fund holdings? My findings indicate that the structure of ETFs causes prices to closely track net asset values. The mean premium in the sample is 0.38\%, and 80\% of the daily premiums are within the range of --0.64\% to 1.50\%. In addition, high premiums are rarely persistent, although there is cross-sectional variation in ETF premium size among members of the iShares MSCI Index Fund Series. These results suggest that arbitrage is highly effective in reducing fund premiums. When the creation or redemption of iShares does occur, the price, on average, quickly moves closer to NAV. Three trading days after the creation (redemption) of shares, the average premium (discount) narrows by 39\% (64\%). The high premiums observed on the iShares Malaysia Fund after the imposition of capital controls provide further substantiation of the ability of fund-facilitated arbitrage to minimize deviations from NAV. The success of the fund-facilitated arbitrage of ETFs suggests a solution for the persistent discounts that plague some closed-end funds. Institutional investors in a closed-end fund could be allowed to return a minimum percentage of the fund's outstanding shares (say, 5\%) to the fund company. The fund company would provide the investor with securities worth the net asset value of the fund's shares. The buying pressure associated with this in-kind redemption process would greatly reduce the discount.}
}