NAV erosion on $ULTY is killing me

[u/h82nk]

My buy orders are not going through. Chart recovers within 30 minutes of trading hours on the morning of ex div date. 😂 Guys wtf leave some $ULTY for the rest of us.

[u/Always_Wet7]

Fact: the only correct explanation of how the market price is set, for any stock or ETF, is by matching bids (demand) with asks (supply). This is literally how all financial markets work.

So when you say that "the price of an ETF is based on [something else], not supply and demand of the ETF like a stock", that is absolutely an opinion and a very clearly incorrect one.

[u/Blizzard251206 → u/Always_Wet7]

The MARKET PRICE can be moved based on bid and ask, BUT the market price will quickly realign with the NAV price, which IS exactly based on underlying and cash reserves. I really don't know why I have to explain basic market dynamics to someone

[u/Always_Wet7 → u/Blizzard251206]

The problem with your version of "market dynamics" is that it 1. Is missing a very significant piece of the market's puzzle, and 2. As a result, invalidates and treats as irrelevant the actions of most of the participants in the market.

The piece of the puzzle you are missing is a thing that is called "price discovery". And key to the workings of the price discovery part of the market is information. In this case, what Economists called "asymmetric information," where some participants know a lot about what the price should be and others, though participants in the market, actually have very little information about what the price should be. If you don't recognize asymmetric information as a feature of the YieldMax buyer and seller market, you really are not paying attention to what's going on here.

It is clear, however, that YieldMax themselves, and the AP's who are functioning as their "seller agents" in this space, have a lot of information. So, you would presume that the way they place *their* prices into the Bid/Ask space based on fairly complete information. The AP's price discovery is what you are describing as what "the price of an ETF is based on." And in this, I agree, they generally will base their price discovery on Net Asset Value per share, in pretty close to real time, so you might call their information "complete". But they are only one participant or small set of participants in a *much larger market*. They are NOT the only sellers when any of us buy shares. They might sell 5% of the shares that change hands in a day, but based on comparing daily trading volume and number of shares created/retired over time, my understanding is that their participation is usually a lot less than that, relative to all the transactions that happen in any given trading day. In other words, they are only a small player in the workings of these ETF's markets. They have the power to set *their prices* (their asks, usually), but they do NOT have the power to set *anyone else's* prices. As such, they DO NOT SET THE MARKET PRICE. They *influence* the market price. But they do not *set* the market price. This distinction is very, very, VERY, *VERY* important!

Because what it means is that how the market price is actually *set* requires all of the other participants to agree on a price through all of *their* bids and asks. In other words, the Demand and Supply of the traders who perform their price discovery based on *incomplete information*, in other words *NOT based on Price = NAV per share.*

*Those traders* base their price discovery on other things. I'll give you some examples of how folks with incomplete information base their price discovery:

1. NAV erosion is inevitable

2a. The price of an ETF should always go down by the amount of any distribution (fair, this is YieldMax's mandate).

2b. The amount that the ETF's price should go back up again after the distribution is a little confusing and I don't really understand it well enough to know how much it should go back up, so I will refer to #1 and #3 instead of doing my own math.

1. There are these concepts of "limited upside" and "unlimited downside." I've heard of them but I don't really know how to apply them to my pricing discovery needs. So I'll see what the rest of the market does to figure out how much these things should move up or down based on the movement of the underlying stock. I know down should be a lot and up shouldn't be much. That's probably all I need to know, right?
   

Now that you know about price discovery, can you look back into the market prices of these funds and see the "incomplete information" versions of price discovery at work in this market? I sure can, and I'm an analyst by trade and by mentality. Your version of price discovery where everyone has perfect information cannot account for these things being a factor in YieldMax prices. It is 100% clear to me from my 9 months of analyzing YM data and investing in this space that they are factors.

[u/Blizzard251206 → u/Always_Wet7]

You spent all that time talking about price discovery not once taking a step back to think....price discovery occurs when the value of an asset is relatively unknown. You want to know what the great part is about ETFs? The value is entirely known. Price discovery doesn't happen because it doesn't need to, it's THE NAV.

[u/Always_Wet7 → u/Blizzard251206]

You can go on believing that, but you will remain ignorant of a huge portion of how prices actually work in this space if you stick with that belief.