ETF Market Price vs. ETF Net Asset Value: An Overview
Unlike mutual funds which may price their shares on a weekly, quarterly, or annual basis, exchange-traded funds (ETFs) price daily. How they're priced depends on the difference between market price and net asset value (NAV).
Key Takeaways
- The ETF market price is the price at which shares in the ETF can be bought or sold on the exchanges during trading hours.
- The net asset value (NAV) of an ETF represents the value of each share’s portion of the fund’s underlying assets and cash at the end of the trading day.
- The NAV is determined by adding up the value of all assets in the fund, including assets and cash, subtracting any liabilities, and then dividing that value by the number of outstanding shares in the ETF.
- The ETF market price and ETF NAV may slightly differ due to intra-day changes in supply and demand.
ETF Market Price
An exchange-traded fund's market price is the price at which shares in the ETF can be bought or sold on exchanges during trading hours. ETFs trade like shares of stocks listed on exchanges so the market price will fluctuate throughout the day as buyers and sellers interact with each other and execute trades. The price will generally rise in the market if more buyers than sellers arise. The price will generally decline if more sellers than buyers are present.
ETF Net Asset Value
The net asset value (NAV) of an ETF represents the value of each share’s portion of the fund’s underlying assets and cash at the end of the trading day. ETFs calculate the NAV at 4:00 p.m. Eastern Time after the markets close.
Net Asset Value Formula
The NAV is determined by subtracting any liabilities from the value of all assets in the fund including assets and cash. Then divide the remainder by the number of outstanding shares in the ETF.
NAV of an ETF = ( Sum of All Assets Including Cash - All Liabilities ) / Number of Shares Outstanding
The NAV is used to compare the performance of funds as well as to report dollar figures for accounting purposes. The ETF also releases its current daily holdings, amount of cash, outstanding shares, and accrued dividends, if applicable. ETFs have the advantage for investors of being more transparent. Mutual funds and closed-end funds aren't required to disclose their daily holdings. Mutual funds usually disclose their holdings only quarterly.
Key Differences
There may be differences between the market closing price for the ETF and the NAV but any deviations should be relatively minor. This is due to the redemption mechanismused by ETFs. Redemption mechanisms keep an ETF's market value and NAV value reasonably close.
The ETF uses an authorized participant (AP) to form creation units. An AP would form a creation unit of shares in all the S&P 500 companies in a weighting equal to that of the underlying index for an ETF tracking the S&P 500.
The AP would then transfer the creation unit to the ETF provider on an equal NAV value basis. The AP would receive a similarly valued block of shares in the ETF in return. The AP can then sell those shares in the open market. The creation units are usually about 50,000 shares of the ETF.
International Markets
The ETF price and ETF NAV may differ due to international markets being open at different times. Imagine an ETF domiciled in one country that is composed of companies from around the world. As the ETF is exchanged during open trading hours, the underlying shares listed are part of a market that may be closed at that time.
This redemption mechanism helps keep the market and NAV values close. The AP can easily arbitrage any discrepancies between the market value and the NAV during the trading day. The ETF shares' market value naturally fluctuates during the trading day. The AP can step in and buy the ETF's underlying constituent components while simultaneously selling ETF shares if the market value gets too high compared to the NAV.
The AP can buy the ETF shares and sell the underlying components if the ETF market value gets too far below the NAV. These opportunities can provide a quick and relatively risk-free profit for the AP while also keeping the values close together. There may be multiple APs for a single ETF, ensuring that more than one party can step into arbitrage away any price discrepancies.
Why Can an ETF's Market Price Differ From the NAV?
The price of an ETF may deviate from the NAV of the ETF due to changes in the supply or demand for an ETF at any single point in time. The market price will typically exceed the NAV if the fund is in high demand with low supply. The NAV will generally be higher if the fund has a high supply with little demand.
How Is the NAV of an ETF Calculated?
The NAV of an ETF is calculated by summing all assets, subtracting all liabilities, and dividing the difference by the number of shares outstanding.
NAV of an ETF = ( Sum of All Assets Including Cash - All Liabilities ) / Number of Shares Outstanding
What Is the Main Difference Between Market Price and NAV?
The ETF market price is the price for which the ETF can be bought or sold on exchanges during trading hours. The NAV is the closing price and value of each ETF holding based on the share's portion of the fund's assets at the end of the trading day.
The Bottom Line
Market price and the net asset value work in tandem to determine ETF prices. Market price is the price at which ETF shares can be bought and sold during trading hours. The NAV is an equation that involves adding up the total of a fund’s assets and then subtracting liabilities and dividing the result by the number of outstanding shares.
Working knowledge of both is important to investors because redemption mechanisms create arbitrage opportunities that can keep price discrepancies between the two at a minimum.
FAQs
The ETF market price is the price at which shares in the ETF can be bought or sold on the exchanges during trading hours. The net asset value (NAV) of an ETF represents the value of each share's portion of the fund's underlying assets and cash at the end of the trading day.
What is the difference between net asset value and market price? ›
An ETF's Net asset value (NAV) represents the value of the securities it holds (including cash), less its liabilities, divided by the number of shares outstanding. ETFs trade at market price, which is the price of the last reported trade on the fund's primary exchange. An ETF's market price might be different than NAV.
What is the difference between price and NAV return? ›
A NAV return uses the fund's change in NAV over time rather than the fund's market value change or total return. NAV can differ from a fund's market price since it is computed at the end of each trading day, while the securities (stocks, bonds, etc.) owned by the fund trade throughout the day.
What is net assets of an ETF? ›
The value of assets less liabilities, often expressed as a per unit or per share value. For example, the net asset value of a managed fund or exchange-traded fund per unit would be calculated by subtracting the fund's liabilities from the fund's assets and dividing the result by the number of units on offer.
What is the difference between NAV and GAV? ›
GAV offers an initial estimate of a property's value, while NAV gives you a more accurate reflection by considering debts and liabilities. This ensures investors make informed decisions based on the property's true financial character.
What is the difference between net asset value and market value of ETF? ›
The price of an ETF may deviate from the NAV of the ETF due to changes in the supply or demand for an ETF at any single point in time. The market price will typically exceed the NAV if the fund is in high demand with low supply. The NAV will generally be higher if the fund has a high supply with little demand.
What is the difference between net value and market value? ›
Book value is the net value of a firm's assets found on its balance sheet, and it is roughly equal to the total amount all shareholders would get if they liquidated the company. Market value is the company's worth based on the total value of its outstanding shares in the market, which is its market capitalization.
What does net asset value tell you? ›
Net asset value is the value of an investment fund determined by subtracting its liabilities from its assets. Per-share NAV is calculated by dividing NAV by the number of shares outstanding. Funds can be open or closed and the pricing of each share is based on NAV.
What is a good NAV value? ›
No specific value can be considered a good net asset value for mutual funds, depending on the investment objective, fund category, and investment strategy. Generally, a good NAV is consistent with the investment objectives and aligns with the investor's risk tolerance, investment horizon, and financial goals.
What is a good price to NAV ratio? ›
When this ratio is above 1, the stock is at a premium to NAV, and when below 1, a discount to NAV. Effectively, it's used to measure the relative value of the REIT's real estate priced in the public market relative to similar assets in the private market.
Compare the market price to the NAV to determine if the ETF is trading at a premium or discount to its NAV. If the market price is higher than the NAV, the ETF is trading at a premium. If the NAV is lower than the price, the ETF is trading at a discount.
Does ETF price matter? ›
Trading volume
Based on these factors, the market price of an ETF may not always reflect its true value. So, do not choose an ETF solely based on its market price. It is essential to evaluate an ETF's underlying assets and long-term prospects before investing.
Why is NAV so important? ›
Understanding net asset value (NAV) can help you make wise investments, assess the position of a company within the market and estimate accurate market values for shares. As an investor, NAV is an important metric to know.
What is the difference between market price and NAV? ›
When the demand for a share increases, its price also increases and vice-versa. On the other hand, NAV has nothing to do with demand and supply market forces. It is the book value of the mutual fund unit. Also, a share's book value and the market price at which it is bought and sold are not the same.
Which is better high NAV or low NAV? ›
The notion that a Mutual Fund's performance is inversely related to its NAV is a misconception. NAV is simply the per unit value of the fund and it does not reflect its quality or potential. For example, a fund with an NAV of Rs 22 is not necessarily superior or inferior to one with an NAV of Rs 85.
What is the difference between net market value and gross market value? ›
GAV can also be understood as the market value of all assets within a fund. NAV is used to describe the current value of all assets held within a property fund less any debt associated with the fund. NAV typically works on a per-share basis, meaning it shows the market value of an individual share within a fund.
What is the difference between market price and NRV? ›
Net realisable value (NRV) is equal to selling price of the goods less the estimated cost of completion of the goods and the cost that would be incurred to sell the goods. Market value refers to the current or most recently-quoted price for a market-traded security.
What is the difference between NAV and MTM? ›
Marking to market is the process where the portfolio of a mutual fund scheme is valued based on the current market prices of securities that are part of the scheme's portfolio. The NAV of a mutual fund is calculated by having all the securities and investments marked to market.
What is the difference between market price and value? ›
Market value is what a good, service or a company might get on an open and fair market. Market price is the price a buyer is willing to pay. If a house has a market value of $250,000, a buyer can pay $275,000 to ensure they don't lose the house to another buyer. The house would then have a market price of $275,000.
What is the Net Asset Value market price? ›
WHAT IS NAV? NAV stands for Net Asset Value. The performance of a mutual fund scheme is denoted by its NAV per unit. NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on a given date.
