Credit: Shutterstock photoApparently the last week around here has been iNAV week. With Matt calling for their banishment, me agreeing with him (much to my dismay) and Ugo Egbunike calling us both idiots.
And Ugo's points are all valid. INAV can be a fantastic tool, and one which smaller investors can use to make money. The action in this week's bond market is a fantastic case in point.
Now, bond pricing is a tricky thing. As Rick Ferri pointed out today in an excellent blog over at Forbes, when the liquidity of the bond market starts getting shaky, bond ETFs can trade well below their fair value. He uses that fact as reason to suggest avoiding bond ETFs. I see it as a trading opportunity.
Let's pick a simple example I've been following all week:the Market Vectors High Yield Municipal Bond ETF (NYSEArca:HYD).
I'm not a bond master; I won't tell you whether this week was a good or bad time to buy high-yield munis. But what I can tell you is that as a rule, it more often trades at a premium than a discount:
And honestly, that's pretty much all I needed to know. Here was a fund with major redemption activity. That redemption activity did two things. First, it depressed the price of HYD as sellers flooded the market. Second, the authorized participants, or Van Eck, had to actually go into the market and sell bonds.
Think about that for a moment. They had to sell bonds. The same bonds that are still in the fund. That means those bonds traded. That means the net-asset value for HYD is solid-it's based on real-world trades. So HYD trading down makes sense. HYD's NAV being down makes sense.
However, there is no case in which a persistent discount in HYD to the fair value of its-now-accurately priced portfolio makes sense, which is why the mean expectation for HYD is that it should trade right around NAV, or even slightly above it.
This was, to be blunt, an irrational discount, and one that was very evident on the screen.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
