ETF question


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Site Team
Jan 31, 2008
Hi all

I have a question about ETFs. Their tax effectiveness and ability to keep the ETF share price close to the value of the underlying stocks rely on arbitrage between EFT shares and actual shares of the stocks used.

How does this work for US market ETFs of foreign stocks that are not ADRs? Don’t time zone differences make price arbitrage difficult and lessen the likelihood of the tax effectiveness as well? Likewise, wouldn't there need to be similar regulations at the foreign exchanges to enable this.

I'm still trying to understand the advantage of an ETF vs foreign fund if aside from lower cost and index based.


I don't think the creation/redemption process of an ETF that invests solely in foreign stocks [like EFA] is going to make it any less tax efficient. The ETF will still be able to get rid of the low cost basis shares.

There might be a bigger spread or discount/premium for the foreign ETF because of the increase costs of buying/selling the stocks, just like there a bigger spread or discount/premium for the micro-cap ETFs.

AFAIK, most mutual funds that invest in foreign stocks are not specifically tax managed, except for Vanguard's TM int'l fund. I would think that the foreign ETFs are going to be more tax efficient than a comparable actively managed foreign fund.

- Alec
most foreign funds if not all foreign funds traded here use whats called fair value pricing. that prevents the aribitrage you mentioned. heres how fidelity does it. as an example the overseas markets close with a big loss. our markets are open and trading. some news is released that benefits the foreign markets and will drive them higher tomorrow. . now if it werent for fair value pricing you could buy the foreign funds at that big drop price at the end of closing of our markets based on how they closed knowing in advance that the just released news will cause them to sore tomorrow.

using computor generated models the funds try to anticipate what the foreign markets will do the next day and reflect it in todays closing prices giving you a price thats up and not down.

im sure everyone has wondered how overseas markets are down before we open but later in the day our foreign funds are up
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