When it comes to trading ETFs, the opening price can be dictated by the volume in the auction rather than the price of the underlying securities that make up the ETF. Any trade submitted after the prior trading session ends but before the next begins is queued up for the opening auction, which can expose the trade to additional risks. If there is a large buy imbalance or a large sell imbalance, the ETF price can swing to large premiums and discounts.
You don’t have to place a large order to receive a poor execution in the opening auction. If other market participants create an imbalance in the opening auction, even the individual who submits a single-share order will participate in the collective execution, which could be at a significant premium or discount to the ETF’s fair value.
While exchanges tend to have orderly ETF opening and closing auctions and extreme imbalances with significant price impacts are rare, it’s important to understand that the risk does exist, and pricing can be more volatile during ETF auctions without the creation/redemption mechanism. Remember that the creation/redemption mechanism helps ETFs remain close to fair value because new shares can be created or redeemed by liquidity providers who have clear insight into the value of the underlying securities in the fund.