Market price

Comparison of the net asset value of ETFs with the market price of ETFs

ETF Net Asset Value vs. ETF Market Price: An Overview

Unlike mutual funds, which may price their shares on a weekly, quarterly, or even annual basis, exchange-traded funds (ETFs) will be priced daily. So how are they valued and what is the difference between market price and net asset value (NAV)?

Key points to remember

  • The ETF market price is the price at which ETF shares can be bought or sold on stock exchanges during trading hours.
  • The net asset value (NAV) of an ETF represents the value of each share’s share of the fund’s underlying assets and cash at the end of the trading day.
  • Net asset value is determined by adding the value of all of the fund’s assets, including assets and cash, subtracting any liabilities, and then dividing that value by the number of outstanding shares of the ETF.

ETF market prices

The market price of an exchange-traded fund is the price at which shares of the ETF can be bought or sold on exchanges during trading hours. Since ETFs trade like publicly traded stocks, the market price will fluctuate throughout the day as buyers and sellers interact with each other and trade. If there are more buyers than sellers, the price will rise in the market and the price will fall if more sellers appear.

ETF Net Asset Value

The net asset value (NAV) of an ETF represents the value of each share’s share of the fund’s underlying assets and cash at the end of the trading day. ETFs calculate net asset value at 4:00 p.m. Eastern Time after market close.Inasmuch asInasmuch as

Net asset value is determined by adding the value of all of the fund’s assets, including assets and cash, subtracting any liabilities, and then dividing that value by the number of outstanding shares of the ETF.

Net asset value is used to compare the performance of different funds, as well as for accounting purposes. The ETF also publishes its current daily holdings, cash amount, outstanding shares and accrued dividends, if any. For investors, ETFs have the advantage of being more transparent. Mutual funds and closed-end funds are not required to disclose their daily holdings. In fact, mutual funds typically only disclose their holdings once a quarter.

Price Differences to Net Asset Value

There may be differences between the closing market price for the ETF and the net asset value. However, any deviation should be relatively minor. This is due to the redemption mechanism used by ETFs. Redemption mechanisms keep the market value and net asset value of an ETF reasonably close. The ETF uses an Authorized Participant (AP) to form Creation Units. For an ETF tracking the S&P 500, an AP would form a unit of creating shares in all the companies in the S&P 500 with a weighting equal to that of the underlying index. The AP would then transfer the creation unit to the ETF provider based on an equal net asset value. In return, the AP would receive a block of shares of similar value in the ETF. The AP can then sell these shares on the open market. The creation units are usually 25,000 to 600,000 shares of the ETF.Inasmuch asInasmuch as

The buy-back mechanism helps keep market values ​​and net asset value in line. The AP can easily arbitrate any discrepancy between market value and net asset value during the trading day. The market value of ETF shares naturally fluctuates during the trading day. If the market value gets too high relative to the net asset value, the AP can step in and buy the ETF’s underlying components while simultaneously selling ETF shares.

Alternatively, the AP can buy the shares of the ETF and sell the underlying components if the market value of the ETF falls too far below the net asset value. These opportunities can provide a quick and relatively risk-free profit for the AP while keeping values ​​close to each other. There can be multiple entry points for an ETF, which ensures that more than one party can intervene in the arbitrage to eliminate any price discrepancy.