Caveat Investor - Mispricing within ETFs

ETFs may not match their market prices to their net asset values. Engle and Sarkar investigated 21 domestic and 16 international ETFs. They found in almost all cases that the mean premium was less than 5 bps [basis points] and the standard deviation was less than 20 bps. 

For domestic ETFs they found that the standard deviations of premiums and discounts at 15 bps were generally less than the bid-ask spreads on these ETFs. The international ETFs incurred premiums and discounts much larger and more persistent, frequently lasting several days compared to domestic ETFs incurring premiums and discounts that were highly transient, typically lasting only several minutes. 

Their overall findings for domestic ETFs displayed pricing close to their net asset values, and when the premiums and discounts occur they were fleeting. As a matter of fact, the domestic episodes last only a few minutes. Investors can view these findings as favorable, especially for domestic ETFs. 

They also compared their results with closed-end funds that do not share the creation and redemption processes of ETFs. They discovered that ETFs exhibited smaller and less persistent premiums (discounts). 

Although the findings here are encouraging, investors are now recognizing that similar results do not hold for ETFs issued after 2006 that use leverage, active, or inverse designed structures.

sources: http://www.cfapubs.org/doi/abs/10.2469/dig.v36.n4.4311