Apologies if this is a really obvious answer, I am very new to this!
I have some UK ETFs which track US markets (e.g. £EQQQ and £CMOP) which are live all day during the UK trading window of 8am to 4.30pm.
I don’t understand what they are tracking between 8am and 2.30pm UK time when the US markets are closed? I did think it was US pre-market activity, but that doesn’t start until 9am UK time.
Am I missing something obvious here? Could someone enlighten me please?
Many thanks in advance!
I would presume its ghosts
Forex markets are open, so £ prices could change even if $ price doesn’t. Not sure if that’s it though. I guess it could also be tracking futures market?
The price of an ETF is determined by supply and demand, so buying and selling. It doesn’t need to coincide with the value of the assets it’s tracking.
Since it’s a UK etf, it changes in price during UK buying hours.
Creation and redemption is also important to understand when dealing with etfs: Guide to understanding ETFs: Creation and Redemption
The ETF represents a basket of stocks but they are not exactly the same, they can be priced differently.
During early UK hours the ETF price is basically dislocated from it’s underlying stocks because it is being priced from changes in information since the US closed. Basically the UK (and other) markets are ‘predicting’ how the US is going to open.
Once the US opens the creation/redemption mechanism (which allows ETFs to be swapped for the underlying shares) effectively forces the two back into alignment
Also bear in mind just because the underlying stocks aren’t trading on the US exchange many are listed elsewhere and could already be trading on other exchanges (e.g. Apple doesn’t have a US pre-market price but is trading in Frankfurt). So the ETF’s ‘predictions’ of US open isn’t only informed by trading activity on the ETF but also underlying stocks and for any large ETF this will be pretty well arbitraged keeping it fairly well aligned.
Knew it!
Makes sense thanks!
Thanks that’s really useful…will give that a read
Much appreciated…the creation/redemption mechanism explains a lot. Very useful to know, thanks!