# International ETFs: What controls their price?



## wat17 (24 January 2011)

I have been doing some research and have become interested in investing in an ETF with USA Shares. These are the two I am looking at.

- Vanguard US Total Market Shares Index (VTS)
- iShares S&P 500 (IVV)

My question is how is the price of the ETF controlled? Is it controlled by the Australian Market only?

For example looking at the Vangaurad ETF (VTS) with its current value is $67. Lets say that the AUD and USD is at parity. Lets say overnight the AUD halves its value and is only worth $0.5USD. Now would VTS double in price to $134, assuming no changes in price of the US shares held?


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## wat17 (30 January 2011)

Anyone?


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## tothemax6 (30 January 2011)

wat17 said:


> I have been doing some research and have become interested in investing in an ETF with USA Shares. These are the two I am looking at.
> 
> - Vanguard US Total Market Shares Index (VTS)
> - iShares S&P 500 (IVV)
> ...



The ETF holds US stock. US stock is denominated in USD. The ETF, however, is traded in AUD. Hence, if rates changed so that 1 USD became worth 2 AUD, yes the value of the ETF in terms of AUD would double.


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## wat17 (5 February 2011)

tothemax6 said:


> value of the ETF in terms of AUD would double.




Thanks for the response. Just to clarify though. You say the "value would double" but the what about the price? I am correct in saying that just because the value may have doubled, does not mean the price will?


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## tothemax6 (6 February 2011)

wat17 said:


> Thanks for the response. Just to clarify though. You say the "value would double" but the what about the price? I am correct in saying that just because the value may have doubled, does not mean the price will?



Yes it is correct that the ETFs price will not necessarily double if its value does (in lock-step). However, (like shares) the ETF has a strong tendency to move towards a price reflecting the underlying assets and their return rates. Why this is the case is a long and ongoing discussion across many threads in the forum.

But as one example: suppose the exchange rate is AUD=USD, an ETF has 1USD worth of assets per unit, returning dividends averaging 5% (and returns all the dividends to the unit-holders), and the units of the ETF cost 1AUD each (perfectly priced).
Then suppose the exchange rate moves to 2AUD=USD, but no one has yet traded any ETF units, and the unit price is therefore still at the old level. We now have the situation that if someone wanted to buy the same US assets as the ETF holds (per unit), it would cost them 2AUD to buy. However, it they bought the ETF units, they can indirectly buy the assets for 1AUD.
So naturally the first thing that happens is people, including funds, buy up the ETF units (thus bidding up the price) until this effect disappears - i.e. when buying the ETF gives you no advantage over buying its underlying assets directly.


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## wat17 (6 February 2011)

Perfect explanation. Thanks. Makes more sense now.


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