In normal market environments, ETFs typically trade at a modest premium or discount to net asset value. However, during March 2020, discounts on some ETFs were significantly greater than historical norms. This dislocation was most apparent in bond ETFs and was driven by many factors, including a sharp decline in liquidity of the underlying fixed income securities, increases in transaction costs of those securities, and nuanced differences in valuation models used by pricing vendors (reflected in ETF NAVs) and market makers (reflected in ETF market prices).
During periods of market volatility, divergence between an ETF's market price and NAV is more likely, particularly for bond ETFs. In fast-moving markets this includes changes to the cost of providing liquidity.
The modest premiums typical of fixed income ETFs that were observed in early 2020 gave way to relatively large discounts in mid-March, as a result of a steep drop-off in the liquidity of the underlying securities, which led to an increase in the price of liquidity for bonds. These discounts quickly reverted to premiums by early April, demonstrating that although discounts can be unsettling, they tend to be short-lived.