Trading Rich to the Basket

Question

An ETF last traded at 25.10 while the value of the basket of stocks it holds (its NAV per share) is 25.00. Compute the premium in basis points, and state which direction an arbitrageur trades the ETF and the basket to lean against it.

Accepted Answer

The premium. frac25.10 - 25.0025.00 = 0.40% = mathbf40 text bps. The trade. The ETF and its basket are the same portfolio in two wrappers, so a 40 bps gap is a relative-value signal with an anchor: sell the ETF at 25.10, buy the basket for 25.00. An authorized participant (AP) can finish the trade physically: deliver the basket to the fund at the end of the day in exchange for newly created ETF shares, and use those shares to flatten the short. Price and NAV are stitched together by that creation mechanism, not by hope. Why the gap can exist at all: creation happens in large units, carries fees and execution costs, and takes time. Inside that cost band the premium can wander; beyond it, arbitrage capital should grind it back. So a market maker reads 40 bps two ways: if costs are, say, 10 bps, this is real edge; if the basket is full of illiquid names costing 50 bps to trade, the "premium" is just the price of replication and nobody should touch it. The trap: comparing the ETF price to a stale NAV. The official NAV is computed from the latest underlying prices, which may lag, the live comparison is against iNAV or your own real-time basket valuation. A 40 bps premium against a baske

Trading Rich to the Basket

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