ETF net asset value (NAV) and how to calculate it

Exchange-traded funds (ETFs) combine a mix of stocks, bonds, and/or other assets to give an investor a slice of many companies or sectors at the same time. ETFs tend to be cost-effective and easy to trade, which helps explain their popularity. Their value can be quantified through a concept called net asset value (NAV).

What is the Net Asset Value of an ETF?

On a basic level, NAV represents the total value of every investment held in an ETF, minus all liabilities, then divided by the total number of ETF shares outstanding. It's a benchmark calculated daily after market closing. Most ETFs must also give an estimated NAV every 15 seconds throughout the trading day. As an ETF's share price fluctuates, its NAV helps investors understand the value of its underlying assets.

An ETF’s share price generally closely follows the NAV of its underlying portfolio. But the price may not match the NAV exactly. When an ETF’s market share price is higher than its NAV, there’s premium. Investors are paying more for that ETF’s shares than the actual value of the underlying assets. When an ETF’s market share price is lower than its NAV, there’s a discount. Investors are paying less for that ETF’s shares than the actual value of the underlying assets.

Why do ETFs trade at a premium or discount?

An ETF may not match its NAV for many reasons. One common reason US-listed ETFs investing in international stocks may trade at premiums or discounts is time zone differences. If the underlying markets in Europe or Asia are closed, the NAV may simply be “stale.” In this scenario, the ETF share price may reflect price discovery; investors are determining the fair value through supply and demand while the market is closed for trading. Put another way, the ETF share price may be more accurate than the NAV that’s several hours old. A premium or discount doesn’t automatically mean the ETF isn’t functioning properly.

With fixed income ETFs, premiums and discounts to NAV can occur for somewhat similar reasons tied to the way that bond markets operate. Many bonds are traded over the counter and infrequently — sometimes not for days or weeks. Once again, this can lead to stale or outdated NAVs for the underlying portfolios of some bond ETFs. Premiums and discounts may simply reflect investors using bond ETFs for price discovery rather than trading the underlying individual bonds. The ETF share price may be more current than the NAV.

Best practices for buying and selling ETFs

ETFs may have premiums and discounts to NAV. It’s important for investors to realize why they’re happening and that they may not reflect an operational shortcoming with the ETF. Premiums and discounts may be more likely in fast-moving, volatile markets. Investors should keep in mind a few best practices when buying and selling ETFs:

1. If possible, avoid trading within 30 minutes of the market open or close.
2. Contact ETF providers’ capital markets teams that can help facilitate large trades (available for financial professionals or talk to your financial professional).
3. Consider using limit orders instead of market orders¹ — particularly in volatile markets — to help with best execution.