If Kid Dynamite knows one thing, it’s maple syrup.
But if he knows two things, it’s maple syrup and financial product construction and mechanics. He’s my go-to guy on closed ends, ETFs, ETNs and then some of the more arcane packaged stuff that we may not ever see again post-Credit Crash.
Anyway, I speak to KD offline and I know what he did on Wall Street before absconding to his wilderness sanctuary so I fully vouch for his knowledge and bona fides on this stuff. I also think it’s awesome when he goes postal on some neophyte speaking out on these products without having the slightest clue what they’re talking about.
I’ve asked Kid to put together a list of the five most infuriating myths about ETFs that he consistently hears repeated in the press and the blogosphere. I’ve got one of them here before I send you over for all five…
Myth: “I can tell from the premium of my closed end fund that it means that The Market thinks (fill in the blank)“
Truth: When looking at a closed end fund, especially one that is difficult to borrow and short, you can’t draw conclusions about what the premium/discount to NAV might mean, because “The Market” cannot correct mispricings. When the market cannot correct mispricings, you can’t draw “The Market thinks ____” conclusions.
$PSLV is the best example of this myth, see http://kiddynamitesworld.com/on-misinterpreting-pslvs-premium/
Repeat after me: PSLV’s 20% premium to NAV is NOT an indication of supply shortages in the silver market. PSLV’s 20% premium is NOT an indication of the true cost of “physical” silver. Seriously, folks, use your heads. PSLV is a closed end fund without any means to arbitrage price discrepancies. That’s it – that’s pretty much all you need to know. There’s no way for traders to create more shares by delivering silver bullion to the trust (like SLV’s creation process), and there’s no borrow available for traders to short PSLV when it gets away from its Net Asset Value.
The Market can’t do anything about the overpricing!
If you’re not checking out Kid Dynamite in general, you’re missing out on funny, intelligent stuff every day.
Read the rest of Kid’s ETF Myths debunked here: