Like mutual funds, each ETF has a net asset value (NAV) that reports what a single share is worth at a particular point in time. The NAV is determined by the total market value of the securities the ETF holds, minus fund liabilities, divided by the number of fund shares. In other words, the NAV is not a fixed value, and moves up or down as the prices of the underlying investments change and the number of outstanding shares increases or decreases.

That change occurs as authorized participants redeem or receive shares in exchange for a basket of underlying securities.


As the values of the indexes underlying ETFs are updated, typically every 15 seconds, the estimated NAVs of linked ETFs are updated as well. These values, known as intraday indicative values (IIV) or underlying intraday NAV (iNAV) are not the same as the prices at which ETF trade, which is determined by supply and demand. But they can provide real-time estimates of the NAV that may influence the type and timing of your orders.

ETF premiums and discounts

Unlike no-load mutual funds, though, you don’t pay the NAV when you buy shares, and you don’t receive that value when you sell. Instead, an ETF trades at its market price as individual stocks do. If other investors are buying when you buy, creating greater demand, you may pay more than the NAV. And if you buy when the majority is selling, you may pay less than the NAV.

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If the price of an ETF is higher than the NAV, you are buying or selling at a premium. And if the price is lower than the NAV, you are buying or selling at a discount. The amount of the premium or discount is usually very small — and the more popular the ETF is, the lower the spread between the market price and the NAV tends to be.

You can find a particular ETF’s premium or discount through the exchange on which it trades, from your financial adviser, or online at financial websites. A unique feature of ETFs is that authorized participants, usually, institutional investors or market makers, may buy large blocks of shares at the NAV with in-kind baskets of the fund’s securities or redeem shares for a basket of securities. This helps ensure that ETF prices don’t deviate significantly from their NAVs and provides a buffer against potentially large premiums and discounts often associated with closed-end mutual funds.

However, the ETF universe includes some funds that are very narrowly focused, some linked to nontraditional fundamental indexes, and others actively managed. As a result, you can’t be assured that the liquidity that characterizes trading in the most popular funds will be true in all funds. Neither are there any guarantees that the market price and the NAV will always be closely aligned.

etf net asset value discount premium

Multiple uses

ETFs have grown steadily more popular since the SPDR SP500 began trading in 1993. Among the reasons are their typically modest expense ratios, their multiple uses, and the convenient route to diversification they provide by making it easy to invest in a basket of securities with a single transaction.

You can buy and sell ETFs in taxable accounts, in tax-deferred and tax-free individual retirement accounts (IRAs), and in Coverdell education savings accounts (ESAs), if the custodian you select is a brokerage firm or has a brokerage division as many mutual fund companies and banks do. ETFs are sometimes available in employer-sponsored retirement savings plans, such as 401 (k), especially when the fund is a commingled trust or the plan provider offers proprietary ETFs. And, if you choose a target date or lifecycle fund, that fund may include one or more ETFs. Similarly, the age-based tracks in a 529 college savings plan may include ETFs.

The commissions

Because ETFs are exchange-listed and must be purchased through a brokerage account, investors generally pay a commission to buy or sell. That is not the case
with no-load mutual funds, which you buy from and redeem with the issuer. The cost is sometimes cited as an argument for selecting an index fund rather than an ETF tracking the same index.

However, a number of brokerage firms do offer fee-free transactions on a limited group of ETFs. In some cases, the list includes funds from a number of major providers and in others it contains exclusively proprietary funds.

Despite the appeal of saving on transaction fees, it’s essential to research before you buy. Some of the commission-free ETFs are highly rated, extremely liquid, and carry low expense ratios. But that’s not always the case. Higher than average expense ratios can cost you more than the often-modest commissions on most ETF transactions. Fees if you sell your new ETF sooner than the firm’s deadline can present the hard choice between limited flexibility and increased cost. And if there is a major discrepancy between a less-liquid ETF’s NAV and its market price, you could pay more to buy or receive less than you would like when you sell.

You’ll also want to evaluate whether you will have access to a broadly diversified choice of funds if you buy exclusively commission-free ETFs. These cautions don’t mean that commission-free trades will not save you money or that you can’t assemble a first-class portfolio from the choices. Rather, they emphasize the need to investigate all aspects of an investment opportunity before you make a decision.

Understanding The ETF’s Net Asset Value (NAV), Premium, Discount and Commissions by Inna Rosputnia

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