- NAVs—Like mutual funds, each ETF has a net asset value (NAV), which is simply the value of all the securities and other assets it holds, minus its liabilities, and then divided by the number of its outstanding shares. NAVs for both ETFs and mutual funds are calculated at the end of each trading day. (Only large institutions, known as authorized participants, transact at the NAV in ETFs, in large blocks called creation units.)
- iNAVs—The stock exchange where the ETF is issued calculates and updates intraday NAVs (iNAVs) every 15 seconds throughout the day, using the last posted market price of the underlying holdings. The iNAVs allow the issuing exchange to show more current values than NAVs, which are determined just once when the trading day ends.
- Market prices—You buy or sell ETFs for these real-time prices through your brokerage account. They fluctuate throughout the day, primarily based on supply and demand for shares. Buyers post the price they’re willing to pay for an ETF (the bid) and sellers post the price they’re willing to accept (the ask). At the close of each trading day, the last trading price becomes its closing price until trading resumes.
Why ETF market prices and NAVs can differIn theory, the ETF’s NAV and market price should be almost identical because they aim to provide the fair value of the same underlying holdings. In real life, however, there are times when an ETF’s market price can be higher than its NAV (trading at a premium) or lower (trading at a discount).
Generally, strong demand for an ETF will push its market price above its NAV, resulting in a premium. Strong selling pressure has the opposite effect, often pushing the market price toward a discount.
When markets are volatile, ETF market prices and NAVs can have larger differences. That’s because NAVs are calculated only once each day, so they can’t match the fast and frequent price changes that ETFs and their underlying securities experience during high-volume trading. Additionally, volatile markets can trigger a large number of orders, which can push the market price of the ETF farther away from its NAV. In general, large discounts and premiums don’t last long.
Why NAVs don’t always show the true value of ETFs’ underlying securitiesSometimes the iNAV doesn’t give a true indication of the value of an ETF’s underlying securities. Here are a few times when this mismatch may occur:
- Closed underlying markets—It’s the most common reason an ETF’s iNAV doesn’t reflect its fair value, especially if it has non-U.S. holdings. For example, ETFs that include non-U.S. securities will have stale prices for the underlying stocks until trading on the appropriate exchanges begins. Until then, the iNAV reflects the closing international stock prices from the prior business day plus currency movements. However, even after international markets close, new information is released, therefore affecting the value of the underlying securities. A similar scenario occurs when the markets of underlying securities are closed because of holidays.
- Timing differences between last traded price and the iNAV—An iNAV updates every 15 seconds. However, an ETF may trade less frequently than that. In cases where some time has passed since the last ETF trade, the timing differences could be the cause of an apparent premium or discount. In these cases, consider looking at the best bid and offer, as they’re sometimes a better indication of the next traded market price.
- Suspended or illiquid underlying securities—During times of market stress, some stocks could be suspended from trading, leading to stale market price inputs for the iNAV. If a significant number of the underlying stocks are suspended, the iNAV becomes a less reliable indicator of the ETF’s underlying value. Another challenge during times of market stress? Valuing illiquid securities, such as bank loans or high-yield bonds, can be more difficult. Under such conditions, an ETF’s traded price may best represent its true value.
Understanding why differences occur can build your ETF confidenceAn ETF’s market price generally won’t stray far from its NAV. However, there are times when it may—during volatility in the securities markets, for example. When these differences do occur, understanding why they happen can help you feel more comfortable with your ETF choices.
All investing is subject to risk, including the possible loss of the money you invest.
Past performance is not a guarantee of future results.
Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks.
Funds and ETFs that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Vanguard ETF Shares are not redeemable with the issuing fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.