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Craig
3:26
How would you explain the wide discounts and premiums historically in HYD?
Dave Nadig
3:26
So, there are a few issues here.
3:27
The first is just how bond ETF's NAV is determined, which is usually off the bid.  Meaning, the price that gets marked as the "NAV" at the end of the day is the "what can i dump this whole portfolio" price.
The trading price at the close is the "what do all the market participants think its worth at 4PM" price.
3:28
Usually, that means most bond funds show a small persistent premium, which is fictional.
Second, Junk Munis are illiquid.  Anytime you have underlying holdings that don't trade that often, the "price" used in the NAV isn't even based on live prices, it's based off a pricing service.
that pricing service uses an algo to make a fictional price based on how like-things are trading.
3:29
But a given bond in HYD might not have traded for days.  So whats it worth right now?  It's a guess.
The very best "guesser" in the market is -- you guessed it -- the ETF that trades all day between muni-bond junkies.
3:30
So HYD is actually the price discovery tool.  In fact, I can guarantee you the price of HYD is one of the inputs to the model of what the bonds it holds should be priced at.  Like a snake eating its tail.
So the +1/=1% swing you see on the premium/Discount is really just fiction -- its' the pricing services and hte market in general lagging behind the "smart" money in the ETF itself.  We see this in HYG, JNK, and other less liquid bond portfolios.
3:31
This is a narrow case -- if you saw a tech ETF trading at a 1% Premium, well, then you'd need to do some digging.
But junk bonds? Not something I'd lose much sleep over.
OK, thats the 30 minute mark.  I appreciate all the questions and thanks everyone.  Sorry if I didnt get to your question this week
We'll be back, same time, same place, next week.
Have a great afternoon!
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