Is an ETF's share price driven by supply and demand for the ETF shares themselves or by the total value of the ETF's holdings? In other words, is an ETF's minute-by-minute price action due to those buying and selling it or by what's happening to the ETF's component parts?
During Regular Trading Hours, the bid/ask of most ETFs is rarely far from the underlying value of the ETF components. More than 80% of all ETFs publish the IIV of the ETF every 15 seconds so traders know that the underlying value is. During Extended Trading Hours, it is quite a different story. The bid/ask can be quite wide, and quite far from the underlying values, and is dictated by a) how the futures are doing, b) news events and earnings releases.
Ultimately, the etf share price is driven by supply and demand of the etf itself. However, the etf will stay in line with the constituents because you can compute iNAV and do creates/redeems at end of day. Liquidity prevents a pure arbitrage in practice.
%% As a general rule; certain exception have applied in the past, thus the Art Cashin rul = ''panic sellers never win.'' Planned sellers+ buyers may win........
I agree with all of the above except I believe because the ETF represent a notional value that sometime is MUCH larger than the underlying assets, there is a possibility of an "accident" where underlying and the ETF become out of sync in times of high stress. I can't recall the article I read in Bloomberg but I think it said that something like a 10x magnification could cause a case of "the tail, wagging the dog", in certain stressful conditions. I mention this because, if it becomes the case, you will not be caught off guard.
This is where the arb comes into play. If they are out of sync then you buy (sell) etf and sell (buy) constituents and do a redeem (create) at end of day. However, at times of stress the constituent quotes are super wide so you need to leg in. The $ is in OTC block trades
Just to add in the abstract, 2 is never really driven by 1 in this sense for pretty much anything market related Even in the simplest model of 1 - underlie 2 - ETF 3 - arbs You would have a relationship like this with weights and influences moving in time. Everything "driving" everything both ways and also feed-backing on itself. To say any one node in the above is in the driver's seat just doesn't make sense.
IMHO, the etf's are going to trade a certain way due to algorithm influence and manipulation, and the stocks are influenced similarly but are going to be more susceptible to dramatic changes in their individual supply and demand. And while the two will meet in the middle due to arbs, baskets of some stocks can be manipulated to compensate for dramatic changes in others, so they are individually less likely to change the course of the index etfs. So as a result, the etf's are in general a bigger driver of volatility than the individual stocks (and that may be unpopular, but is imo.)