Eyeing the ETF - Tracking the tracker

In my previous posting I mentioned that ETFs are trackers of the market. If you need a primer on ETF then you could read here. Basically it means that ETF is supposed to go up and down together with the market, hopefully in the same proportion. So if one thinks that the market is going up, he can take a position in the market by buying an ETF from a (familiar) stock market instead of buying the individual component stock or hitting the futures market.

But lets us take a look at what happens in the reality and try to make sense out of it all. 

Let's take last Friday, the 20th of September 2013.





On a daily basis it is interesting to note that on the 20th, the KLCI index improved by 0.5%. However, the tracker ETF, the FBM30 did not move at all in terms of pricing, stuck at RM1.77 per share/unit.

Does this mean that the ETF is not tracking the index? The answer is the ETF is still tracking the index and we can see from the NAV of the FBM30 which improved by 0.49%, almost identical to the changes in the KLCI. But the price might not be so sensitive to the changes due to several factors, including:

1. The tick, the minimum price movement. The minimum price movement for shares above RM1.00 is 5 sen. In this case, a 5 sen movement would translate to a 2.8% movement to the price of the shares, way above the actual movement in the value of the ETF.

2. The demand and supply for the ETF.

The DJIM seems to have an inflated effect on the price of the ETF. Not only is it trading at a premium to the NAV, the price moved significantly compared to the movement in the NAV. This divergence is also partly due to the same reasons mentioned above.

I don't know about you, but this is really interesting !$!

Disclaimer: 

This is not a recommendation to invest at all, this is to give you more information so that you know more about investing. This is EDUCATIONAL