Funds with Difficult-to-Trade Underlying Baskets
This valuation technique is also the same for funds where the underlying basket may be less liquid, like those of some bond or commodity funds. These funds work in a similar manner as if the basket was not trading at the same time as the fund. The IV may not always be a good indicator of fair value. The ETF bid and ask should always reflect the costs involved in trading the underlying basket as calculated by a liquidity provider. If there is a lot of slippage expected in trading the actual basket, as would be the case in pricing bonds in an over-the-counter (OTC) market versus an equity on a transparent exchange, then you will see wider spreads as well.
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