How can ETFs track indices?

[GPO]

Sounds like a newbie question but still:

Let's take ASX:IVV, an ETF that tracks S&P 500. The ETF itself is traded within ASX trading hours, and the price is obviously determined by those who buy and sell. On the other hand, stocks that compose S&P 500 are traded within the U.S. trading hours, and the index value is derived from the prices of those stocks. How can possibly the two be in sync? What am I missing?

 

[sinner]

Sounds like a newbie question but still:

Let's take ASX:IVV, an ETF that tracks S&P 500. The ETF itself is traded within ASX trading hours, and the price is obviously determined by those who buy and sell. On the other hand, stocks that compose S&P 500 are traded within the U.S. trading hours, and the index value is derived from the prices of those stocks. How can possibly the two be in sync? What am I missing?

S&P 500 futures are traded 24/6 globally on the CME. Many other ETFs and synthetic derivatives tracking an identical portfolio also exist in Asian and European markets to provide further arbitrage/hedging opportunities for market makers.

 

[fraa]

Fellow noob, but I believe the party behind the etf has market maker arrangements in place so that they themselves buy/sell units to keep it in sync at a value that tracks the underlying and makes arbing by other parties not be profitable.

In the case of the IVV though, SPX futures do trade at ASX hours so it should track the movement in SPX futures + AUD.USD forex rate.

For etfs where the underlying does not trade, I think movement is due to AUD.USD forex rate.

I THINK thats what happens - please check it out yourself I could be wrong.

Sounds like a newbie question but still:

Let's take ASX:IVV, an ETF that tracks S&P 500. The ETF itself is traded within ASX trading hours, and the price is obviously determined by those who buy and sell. On the other hand, stocks that compose S&P 500 are traded within the U.S. trading hours, and the index value is derived from the prices of those stocks. How can possibly the two be in sync? What am I missing?

 

[History Repeats]

You can read the prospectus of that ETF. Basically they rebalance the share percentage end of each day and also have a tracking error to comply with. i.e: with in 3%.

 

[thembi]

I found this blog helpful to answer this question

http://www.betasharesblog.com.au/dealing-with-time-zones/

 

[GPO]

I found this blog helpful to answer this question

http://www.betasharesblog.com.au/dealing-with-time-zones/

Thanks thembi, spot on for my confusion about time zones! In addition, I found another article there which explained my other confusion (about how trading one equity (ETF) can be kept in sync with trading other equities seperately).

Market Makers: Market makers provide liquidity in an ETF. By way of comparison, a listed company is “close-ended” (meaning there is a set number of shares outstanding). Thus the presence of more buyers than sellers in the market will tend to drive the price of a stock up, and more sellers than buyers will tend to drive the price of a stock down. On the other hand, an ETF is an “open ended” vehicle, units are held in inventory by a market maker who is able to sell units to investors when there are buyers, and buy units from sellers. Importantly, if they need to, market makers may create more or sell down units to the fund manager to meet market demand. - See more at: http://www.betasharesblog.com.au/the-key-players-in-an-etf-a-refresher/#sthash.VWyKr3u9.dpuf