How does an ETF that tracks a foreign market work since it's traded on a U.S. exchange?

Question

If I've invested in an Asian ETF, that stock symbol is being traded on the U.S. exchange (AMEX) while Asian markets are closed. How does that work?

Answer 1

The ETF buys stocks for the particular country. Some use stocks on the foreign exchange, others use ADRs. As an example consider these two, both tracking China.
FXI holdings are stocks traded on the Hong Kong exchange.
PGJ holdings are ADRs traded on US exchanges.

In both ETFs, even though they are traded on the US exchange it's underlying value is derived from the Chinese stocks.

Answer 2

The ETF shares trade trade on their own supply and demand pricing and are supposed to represent an underlying basket of regular common stocks. The connection between the two is provided by one or more large market making brokerages.

These big boys deal in ETF "creation units." Each unit represents 10,000 ETF shares. They buy and sell ETF shares and package them as creation units. They then trade these units for the underlying common stocks and sell them for cash (or vice versa). Why? Because they make money from the small(?) error between the ETF price and the underlying index price.

If the ETF fund is very large with high volume, these errors are 0.1 to 0.2%. If the ETF fund is small with low volume these errors can be 1 or 2 or even 3%.

If you trade an Asian ETF when the Asian markets are closed, you might be trading with a 4 or 8% error. The two markets can't really be connected in real time can they??

I suppose it is possible that there is more ETF trading volume in New York, than there is trading volume of the common stocks in Hong Kong; in which case the ETF is more "correct" than the actual common stock. But that is not likely.