"The stock price of a passively managed ETF will also sell in the marketplace within 1% of its NAV." Explainwhy you agree or disagree with this statement

What will be an ideal response?

One would disagree with the statement in that it is possible (even if not the norm) for passively managed ETF to sell in the marketplace beyond 1% of its NAV. While the calculation for NAV involves assets and liabilities,market prices are determined by supply and demand. Thus, deviations beyond 1% between the prices and NAV are possible. Below we supply more details.

Managers of pooled investment vehicles can pursue either active or passive strategies. A pooled investment vehicle whose investment objective is to replicate some bond index is referred to as a passive (or indexed) fund and is said to be a beta product.Open-end bond funds are portfolios of bonds whose NAV or price is determined only once each day, at the close of the day. Fund shares are sold and redeemed at the closing NAV. Thus, there is no deviation as the price and the NAV are the same. For close-end funds and ETFs, the NAV can deviate and at times deviate significantly beyond 1% of their NAVs.

Numerous studies have sought to explain why there can be a significant divergence between the fund's market price and the fund's NAV. Research provides several factors that cause a discrepancy between market price and NAV. The factors are those that impact supply and demand and include: current yield on stock price/NAV (relative to other closed-end funds/investmentproducts); current discount/premium; dividend cuts/increases; fund performance (relative to other closed-end funds/investment products); performance of the closed-end fund's sector (relative to other closed-end funds/investment products); investor sentiment; market outlook; sector outlook; and, availability of comparable products. Thus, there are a lot of factors that can potentially cause more than a 1% or more deviation from a fund's NAV.

It should be noted that exchange-traded funds (ETFs) are hybrid closed-end funds that trade on exchanges typically (but not always) very close to the NAV. Unlike a closed-end fund wherein its market price can trade at a significant discount from the NAV, the creation and redemption process for an ETFprovides a mechanism for an ETF's market price to trade very close to its NAV and thus within 1% of its NAV.To avoid the drawback of aclosed-end bond fund where the fund's market price is below the fund's NAV, an investorwants the ETF's market price not to deviate significantly from the ETF's NAV. To accomplishthis requires the intervention of a third party that is charged with the responsibilityof arbitraging any discrepancy between the ETF's NAV and the ETF's share price.As described in the previous problem, an authorized participant (AP) is needed to prevent this deviation.