ETF pricing and valuations

ETFs are bought and sold during market hours during which the market price of the ETF is determined by the value of the fund’s holdings as well as supply and demand in the market place for the ETF. While the share price is largely determined by the underlying value of the portfolio (known as the Net Asset Value or NAV), there may be some differences from time to time especially during times of market volatility.

The market price is different to an ETF’s NAV which shows the official value of the ETF once a day, based on the closing prices of the underlying securities. The NAV is used to measure ETF performance.

Understanding ETF market prices and NAV

 


What is the Net Asset Value (NAV) of an ETF?

The NAV of an ETF represents the value of all the securities held by the ETF - such as shares or bonds and cash minus any liabilities such as Total Expense Ratio (TER), and divided by the number of shares outstanding.

NAV is most often expressed as the value per share. An ETF’s official NAV is calculated once a day, based on the most recent closing prices of the underlying securities, even though the prices of these underlying securities may be hours apart if they trade in other time zones.

For example, some of an ETF’s holdings may be traded on exchanges in other time zones, for example in the US or Asia.

 


What is the market price of an ETF?

An ETF’s market price is the price at which investors can buy or sell an ETF on an exchange. This price may deviate from the NAV of the ETF depending on demand for and supply for the ETF at a point in time. The price is usually expressed as a Bid price (the price a buyer is willing to pay for a security) and an Ask/Offer price (the price that a seller is willing to accept for a security).

 


What is an ETF’s NAV used for?

The NAV of the ETF is based on the underlying securities’ closing prices. Hence, when estimating ETF performance versus the index it is tracking, ETF NAV and index closing price should be used.

 


If an ETF’s price reflects the market price of the underlying assets, why can it differ from NAV?

An ETF’s price reflects the value of the underlying ETF securities during the day (or what investors expect those values to be if the underlying markets are closed). For example, an Irish-domiciled ETF with exposure to Japanese stocks is traded on the London Stock Exchange, because this exchange is open, however, the ETF includes shares which are listed and traded on an overseas stock exchange, and that market is closed at that time. In addition to that it is also affected by the demand and supply for the ETF in the market place. This can lead to ETF price deviation from the ETF NAV.

 


What is an ETF’s premium or discount?

An ETF is said to trade at a premium when its price exceeds its NAV. An ETF is said to trade at a discount when its price is below its NAV. Premiums and discounts are usually negligible for the majority of ETFs but they can be large during volatile times.

Risk: Like all investments, your capital and income is at risk and you may get back less than you originally invested. As an ETF tracks a financial index, if the financial index falls, the value of your investment will also decrease. Before investing, we recommend you speak to your financial advisor.