iShares - Guidance - Pricing and Spreads

Where and How to Trade, Conditions, Financial Clearing, Costs, Dividends, and Other Rights

Difference Between the Primary and Secondary Markets, Creation and Redemption, Measuring Liquidity

Definitions and Differences of Brokers Qualified for Trading and Authorized Agents, Creation and Redemption In-Kind

Market Impact, Share Value, Positive/Negative Arbitrage, Factors Determining Spreads and Comparisons

	Is it possible to trade at the share value? What is the difference between the share value and the closing price?
	What is the function of the Indicative Value (IOPV)?
	Can the Index Funds be traded with positive/negative arbitrage on the Brazilian stock exchange? How can this be minimized?
	How does price arbitrage benefit investors?
	What factors contribute to the spread of an Index Fund?
	Can I affect the market when trading Index Funds?

On the primary market, Authorized Agents can create/redeem the Index Funds quotas at the share value on behalf of the final investors. No creation/redemption fees are charged in these transactions. The closing price represents the price quoted in the last trade of the trading day on the Brazilian stock exchange. Meanwhile, the share value is calculated by the administrator using mark-to-market for all of the assets and liabilities comprising the fund portfolio.

The Indicative Value (IOPV) is the theoretical value of a share of the Index Fund at any given time. It is calculated by multiplying the asset amounts of the basket by the most recent respective prices in trades on the Brazilian stock exchange. The Indicative Value is calculated every 30 (thirty) seconds during the hours of operation of the Brazilian stock exchange and serves as a guide for pricing the iShares Index Fund quotas.

There can be positive/negative arbitrage. The differences between the market trading price and the Indicative Value can be positive (positive arbitrage) or negative (negative arbitrage). In any event, arbitrage on such spreads must be done by market agents in the creation/redemption process, which tends to keep the prices on the Brazilian stock exchange fluctuating around the Indicative Value.

The mechanism of arbitrage between the share price for the Index Fund and the price of the assets that comprise the fund portfolio can minimize this spread, which helps fund investors achieve their objective of obtaining returns on investment that match the general performance of the index.

The main factors that may contribute to the spread between the purchase and sale quotes for the quotas of an Index Fund are:
(i) the volatility of the assets that comprise the fund portfolio;
(ii) the liquidity of the assets that comprise the fund portfolio; and
(iii) the investors’ perception of the market.

This situation may arise if your purchase or sale order is very large in relation to the volumes traded during the day. This can, however, be minimized significantly if the investor is aware of the liquidity of the secondary market and the advantages of trading on the Brazilian stock exchange or on the primary market through an Authorized Agent. For further details on this subject, speak to your broker or refer to the earlier questions in the section on operational/liquidity aspects.