By now you have heard about the market dislocation that occurred on Monday. After closing 530 points lower on Friday, futures on the Dow Jones Industrial Average were suggesting the Dow would open hundreds of points lower on Monday. Indeed, that is what happened, and then it proceeded to plunge to a 1,089-point loss, about six minutes into the session. From there, it rallied nearly 1,000 points higher before turning south again to finish the day off 588 points.
It was a topsy-turvy day for the Dow, but that is not the index I want to talk about. Instead, I’m going to focus on the S&P 500 because there are three ETFs that try to mimic its performance. The S&P 500 traveled a similar path to the Dow. In percentage terms, the S&P 500 was off 5.3% at its low and down 3.9% for the day.
The three ETFs designed to track the S&P 500 are the SPDR S&P 500 (SPY), iShares Core S&P 500 (IVV), and Vanguard S&P 500 (VOO). All three hold the same 500 stocks in the same identical proportions. These 500 stocks happen to be among the most liquid stocks on the planet, so in theory, there should be no concerns about the liquidity of the underlying stocks.
ETFs are required to publish their intraday-NAV (“iNAV”) every 15 seconds throughout the trading day. This is where we see the first discrepancy. VOO’s iNAV was down 5.2% at its morning low and came closest to matching the -5.3% low in the S&P 500. Meanwhile, the iNAV’s for SPY and IVV both registered 8.1% drops (2.8% worse than the index). However, investors cannot buy or sell ETFs at the iNAV, so the actual price performance is more important.
For the entire day, all three ETFs did slightly worse than the 3.9% drop in the index. Both SPY and VOO finished 4.1% lower, while IVV declined 4.2%. The intraday action is another story. At the low point of the day, the Vanguard S&P 500 (VOO), which is probably the least liquid of the three, held up the best by holding its decline to 7.2%. The SPDR S&P 500 (SPY) is far-and-away the most liquid ETF available, but it was down 7.7% at its nadir. However, this looks downright excellent when compared to the iShares Core S&P 500 (IVV), which was posting a 26.0% decline at the same moment in time.
Monday was a mini version of the 2010 Flash Crash. In many instances, ETF market makers pulled their bids and stepped away. IVV was trading more than 19% below its intraday fair value (or -26.0% on the day), and it was far from being the worse. The Guggenheim S&P 500 Equal Weight ETF (RSP) owns the same 500 stocks as the other three discussed above, although in different proportions, and it was down 42.7% at its low.
My screens were showing dozens of ETFs trading down 30%, 40%, 50%, or more during the first hour of trading when it was obvious to me that something in the -5% to -10% range was more realistic. Panics provide great opportunities to step in and be a buyer, but they are terrible times to be a seller. ETFs have the ability to create and redeem shares in order to stabilize supply and demand imbalances and keep the trading price aligned with the true underlying value. Although price-to-value discrepancies can occur during market panics, they are typically rectified within minutes or hours.
Disclosure covering writer: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.