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Speaker 1: Welcome to ask Fear and Greed. Will we answer all

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Speaker 1: kinds of questions about business and finance and investing. I'm

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Speaker 1: Michael Thompson and hello Sean Aylmer.

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Speaker 2: Hello Michael.

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Speaker 1: You're already sound wary. You need not be wary. Actually

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Speaker 1: maybe you should do.

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Speaker 2: You know what I worry about on Asking and Greed

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Speaker 2: Often like eighty percent of the answer is easy. Yeah,

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Speaker 2: it's his final twenty percent the little detail bits that

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Speaker 2: are hard.

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Speaker 1: Yeah, And that's the part with you love asking me better.

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Speaker 1: This is quite enjoyable. If I'm honest, it is quite fun.

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Speaker 1: Today's question has come from a listener, Brian, who sent

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Speaker 1: us an email through the website. He went to Fearangreed

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Speaker 1: dot com dot au and he says, I Fear and

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Speaker 1: Greed love the show. Thank you Brian, great start, Brian,

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Speaker 1: Thank you full marks. I haven't asked Fear and Greed

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Speaker 1: question that I can't quite get my head around. What

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Speaker 1: did determines the traded price of an ETF and exchange

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Speaker 1: traded fund? I assume stock prices are set by supply

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Speaker 1: and demand, But does an ETF buy and sell its

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Speaker 1: own units to ensure the price stays in line with

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Speaker 1: the relevant index.

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Speaker 2: So essentially Brian has answered his own question because yes, yes,

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Speaker 2: and yes, great, that was easy. And an exchange traded fund,

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Speaker 2: you're buying a unit in a fund, so you're not

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Speaker 2: buying a Commonwealth Bank share as you would if you're

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Speaker 2: buying common Wealth Bank share. You're buying an ETF, so

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Speaker 2: you're actually just buying a unit. The actual securities are

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Speaker 2: owned by the issuer of that unit, so we're not

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Speaker 2: suggesting any of these being better or worse. But let's

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Speaker 2: say Beta shares has an ETF, you're actually buying a

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Speaker 2: unit in the Beta shares ETF bet to shares own

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Speaker 2: the underlying asset though. Okay, so keep that in mind.

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Speaker 2: Lots of benefits in them. You know, they can make

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Speaker 2: easier cost effective, You get access to markets you couldn't

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Speaker 2: do otherwise, diversification, stuff like that. Right, So ETFs generally

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Speaker 2: seem to be well accepted. The value of an ETF,

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Speaker 2: and this is to Bryan's point, it's actually determined by

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Speaker 2: looking at the net asset value of the underlying security.

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Speaker 2: So what that means is the value of each the

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Speaker 2: Commonwealth Bank share or the property portfolio. So what that

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Speaker 2: value is valued at they're all put together and you

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Speaker 2: get the net asset value of the ETF. However, that

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Speaker 2: doesn't mean it's what you're buying and selling them for.

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Speaker 2: And this is to Bryan's point.

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Speaker 1: Okay, because if there's really.

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Speaker 2: Strong demand for an ETF or people don't like that

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Speaker 2: ETF they want to sell them, that supply and demand

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Speaker 2: can mean the net asset value moves out of c

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Speaker 2: with the market price. So let's say, as an example,

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Speaker 2: the net asset value is one hundred dollars and the ETF.

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Speaker 2: Everyone wants that because it's gold, and all of a

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Speaker 2: sudden people think gold is going to go to a

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Speaker 2: four thousand. I don't want to buy gold. I want

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Speaker 2: to buy the ETF. Let's jump on that. So the

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Speaker 2: net asset value might be one hundred dollars, but there's

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Speaker 2: so much demand for it people are prepared to overpay.

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Speaker 2: So they pay one hundred and one one hundred and

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Speaker 2: two dollars for.

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Speaker 1: It, okay, which is actually more than the total value

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Speaker 1: of saying or the miners, the gold miners and things

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Speaker 1: that are held within that.

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Speaker 2: Yes, so they call that a premium to net asset value.

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Speaker 2: A discount of this is when it's less. Brian makes

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Speaker 2: a really good point. The big difference between an ETF

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Speaker 2: and managed funds, and that is that the issueer, so

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Speaker 2: Beta shares in our example, can create or redeem units

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Speaker 2: to match investor demand. So what an ETF can do that?

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Speaker 2: Pretty much no one else can do. One hundred. Let's

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Speaker 2: say it goes to one hundred and two, but Vata

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Speaker 2: Shares decides this should actually be one hundred, not one

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Speaker 2: hundred and two. They can issue more units in the

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Speaker 2: ETF to satiate the demand. Okay, that gets it back

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Speaker 2: to one hundred, to.

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Speaker 1: Keep it in line with its underlying.

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Speaker 2: Its net ASCID value. Okay, yeah, yeah. So for that reason,

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Speaker 2: the market price, as we're talking about it should always

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Speaker 2: be around the net asset value. And if not, the

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Speaker 2: issue isn't really doing their job.

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Speaker 1: What if the market price is below then the net

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Speaker 1: asset value.

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Speaker 2: So they can redeem because people are buying and selling

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Speaker 2: these all the time, so they could actually redeem. So

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Speaker 2: if people are selling, they can take those and just

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Speaker 2: cancel them.

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Speaker 1: Okay, so they have fewer adds some in, they can

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Speaker 1: take some away, and in doing sobill.

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Speaker 2: This net asset value. Got your idea. There's also like

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Speaker 2: I mean, if you really want to go. There's things

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Speaker 2: like liquidity risk in ETFs, so there's assets that can

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Speaker 2: don't be sold, potentially underlying assets that can't be sold

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Speaker 2: that puts a risk into it. There's counterparty risks, so

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Speaker 2: you know the issuer. You've got to trust that issuer

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Speaker 2: to be able to do the right thing. So sometimes

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Speaker 2: those things, the liquidity risk and counterparty risk can affect

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Speaker 2: the price, the market price a little bit. But broadly

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Speaker 2: Brian's question, he answered in as much as it's a

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Speaker 2: net asset value, but as a premium discount, and the

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Speaker 2: issuer can actually take ets units, added units or subtract units.

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Speaker 1: Yeah, Brian might have answered his question, but god, you

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Speaker 1: added some detail. He turned a thirty second podcast into

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Speaker 1: eight and a half.

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Speaker 2: Minutes after you'd laught at the twenty percent that you

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Speaker 2: know the eighty percent right, and that one I probably

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Speaker 2: did know the answer to, so I thought, stuff, you're

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Speaker 2: going heavy.

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Speaker 1: You were all over this one. It was a good question, though,

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Speaker 1: great question, yea fantastic and especially and of course we

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Speaker 1: are not an investing podcast, and you should seek professional

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Speaker 1: advisor for making investment decisions. But there has been such

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Speaker 1: an appetite for ETFs and so much education going on

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Speaker 1: around it as well. So these kinds of questions are fantastic.

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Speaker 2: Yeah, money smart dot gov dot au is a great

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Speaker 2: place to answer a lot of these questions.

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Speaker 1: Actually, yeah, or here or Fear and Greedy too. All right,

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Speaker 1: thank you Brian for the question, and thank you Sean.

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Speaker 1: Are you and Michael remember if you've got something that

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Speaker 1: you would like to know, then send through your question

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Speaker 1: LinkedIn Instagram, Facebook, any of the social media platforms, or

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Speaker 1: at Fearangreed dot com dot au. I'm Michael Thompson and

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Speaker 1: this is ask Fear and Greed