Tremendous failure today in bond ETF arbitrage, liquidity

Market makers are supposed to keep the ETF prices close to NAV. I have never in my life seen the share price stray this far from NAV, in what are supposed to be liquid securities with high daily volume.

Name of ETF

Net Asset Value

Market price

Discount to NAV

AGG (broad bond market)



-8.5% below NAV

HYG (junk bonds)



-7.9% below NAV

LQD (investment grade corp)



-4.2% below NAV

This could be a failure of the iShares mechanism, it could be a failure of authorized participants (maybe they don't want to play any more), or it could have entirely to do with lack of liquidity in the underlying.

This is very scary folks. AGG is a very broad bond market index, and is like most bond mutual funds. And this demonstrates how the ETF mechanism can fail.

My prediction, we will see a lot more failures of ETFs in coming years. Anything with illiquid underlying is at big risk: that includes most commodity ETFs, certainly bond ETFs, foreign stock ETFs, preferred shares, anything with derivatives.

- Perpetual Bull

EDIT: The AGG situation is most interesting because this bond fund largely holds US Treasuries and agency bonds which are supposedly liquid and easily priced. The investment banks should have no problem arbitraging something like AGG, but clearly they did have problems to the tune of a whopping 8.5% mispricing. Mutual funds probably had all the same problems as ETFs, so I should not pick on ETFs.