How does the performance of an ETF compare with the performance of its underlying index?
Exchange-traded funds are designed to provide investment results that generally correspond to their underlying benchmark index by holding a portfolio of securities designed to give similar price and yield performance. In the secondary market, one mechanism that helps to keep an ETF trading on the exchange at a price close to the value of its underlying portfolio is arbitrage. Because ETFs are both created from the securities of an underlying portfolio and can be redeemed into the securities of an underlying portfolio on any day, arbitrage traders may move to profit from any price discrepancies between a fund and the portfolio. This in turn helps to close the price gap between the two. (ETF creations and redemptions are restricted to large transactions, typically in multiples of 50,000 shares but ranging from 25,000 to 600,000 shares, usually transacted by large investors and institutions.) Of course, because of the forces of supply and demand and other market factors, there may be time
