Bond ETF investors may be taking a haircut when their funds add or reduce shares.
According to Bond ETFs: A New Way to Buy High or Maybe Sell Low, the WSJ‘s Tom Lauricella writes that, in the short history of bond ETFs, investors have tended to pay more than the underlying portfolio is worth.
The difference between price of an ETF and its net asset value (NAV) is driven by the bid-ask spread. The spread is important because new ETF shares are created when market makers buy bonds at the higher ask price and then exchange those bonds for ETF shares. At the same time, the NAV for those same shares is based on the lower bid price.
Lauricella notes that the Vanguard Total Bond Market ETF (BND) has closed above its NAV 98% of the time since the fund started trading.