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Posted by on Feb 21, 2013 in Active Management, AdvisorShares

High Yield Mutual Fund Pricing is not a Free Lunch

A few observations after reading an article on High Yield mutual funds and ETFs in Investment News

While they are correct, that index high yield ETFs can trade at premium and discounts to the indicative value, the important thing to remember is at their core, most ETFs (40 Act ETFs) in some aspects are just like mutual funds.  Yes, with a high yield ETF you can see premiums and discounts represented in the bid and ask price throughout the day, which is determine by a large crowd of participants (retail buyers and sellers, institutional buyers and sellers, prop traders, etc…).  We believe this is a very efficient way to price.

Where as a high yield mutual fund can and will often price their NAV at a “fair value” price.  This also represents a premium or discount to the underlying bonds, however mutual funds do not provide the transparency of an “indicative value” to understand how much that fair value NAV is a premium or discount to the underlying bonds.  You should call your high yield mutual fund provider to understand how often they use this fair value pricing – you may be surprised by that answer.  (note this same process that happens to international equity funds as well).

Our take: there is no “NAV pricing” free lunch in the mutual fund space, we believe the “crowd” determined price of a high yield ETF is a better than the mutual fund sponsor determined “fair value NAV”.

Long live active ETFs!