This morning Bloomberg published a story titled “ETF Simplicity Betrayed by Volatility in Market Selloff.”
In the article, the authors contend that they’ve run the numbers, and that ETFs are just flat-out more volatile than mutual funds. Here’s the lead:
“Share prices for the 10 largest diversified emerging-market ETFs on average were 42.6 percent more volatile than their underlying indexes from May 22 to June 24.”
Let’s break down what they could possibly mean here, and let’s start with a few baselines.
While the article claims it’s not addressing the issue of premiums and discounts—that is, how far off fair value a given ETF closes in market trading versus its underlying index—it’s fairly clear that’s not the case. If it were, then the following chart wouldn’t make sense.
This is a rolling look at the 20-day historical volatility of the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and the actual index it tracks, over the period in question. I’m looking here at the actual NAV, and as you’d expect, they track extremely closely:
The bottom line looks at the difference, and you might ask: “Well, why is there any difference at all?”