ETF Market Price vs. ETF Net Asset Value: What’s the Difference?

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

Exchange-traded funds (ETFs) price daily unlike mutual funds which may price their shares on a weekly, quarterly, or annual basis. How they’re priced depends on the difference between market price and net asset value (NAV).

Key Takeaways

• The ETF market price is the price at which shares in the ETF can be bought or sold on the exchanges during trading hours.
• The net asset value (NAV) of an ETF represents the value of each share’s portion of the fund’s underlying assets and cash at the end of the trading day.
• The NAV is determined by adding up the value of all assets in the fund including assets and cash then subtracting any liabilities and finally dividing that value by the number of outstanding shares in the ETF.
• The ETF market price and ETF NAV may slightly differ due to intra-day changes in supply and demand.

ETF Market Price

An exchange-traded fund’s market price is the price at which shares in the ETF can be bought or sold on exchanges during trading hours. ETFs trade like shares of stocks listed on exchanges so the market price will fluctuate throughout the day as buyers and sellers interact with each other and execute trades. The price will generally rise in the market if more buyers than sellers arise. The price will generally decline if more sellers than buyers are present.

ETF Net Asset Value

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

The NAV is used to compare the performance of funds as well as to report dollar figures for accounting purposes. The ETF also releases its current daily holdings, amount of cash, outstanding shares, and accrued dividends, if applicable. ETFs have the advantage for investors of being more transparent.

Important

Mutual funds and closed-end funds aren’t required to disclose their daily holdings. Mutual funds usually disclose their holdings only quarterly.

The Net Asset Value (NAV) Formula

The NAV is determined by subtracting any liabilities from the value of all assets in the fund including assets and cash. Then divide the remainder by the number of outstanding shares in the ETF:

NAV of an ETF = (Sum of All Assets Including Cash – All Liabilities) / Number of Shares Outstanding

Key Differences

There may be differences between the market closing price for the ETF and the NAV but any deviations should be relatively minor. This is due to the redemption mechanism used by ETFs. Redemption mechanisms keep an ETF’s market value and NAV value reasonably close.

The ETF uses an authorized participant (AP) to form creation units. An AP will form a creation unit of shares in all the S&P 500 companies in a weighting equal to that of the underlying index for an ETF tracking the S&P 500.

The AP would then transfer the creation unit to the ETF provider on an equal NAV value basis. The AP would receive a similarly valued block of shares in the ETF in return. The AP can then sell those shares in the open market. The creation units are usually about 50,000 shares of the ETF.

International Markets

The ETF price and ETF NAV may differ due to international markets being open at different times. Imagine an ETF domiciled in one country that’s composed of companies from around the world. The underlying shares listed are part of a market that may be closed at that time because the ETF is exchanged during open trading hours.

This redemption mechanism helps keep the market and NAV values close. The AP can easily arbitrage any discrepancies between the market value and the NAV during the trading day. The ETF shares’ market value naturally fluctuates during the trading day.

The AP can step in and buy the ETF’s underlying constituent components while simultaneously selling ETF shares if the market value gets too high compared to the NAV.

The AP can buy the ETF shares and sell the underlying components if the ETF market value gets too far below the NAV. These opportunities can provide a quick and relatively risk-free profit for the AP while also keeping the values close together. There may be multiple APs for a single ETF, ensuring that more than one party can step into arbitrage away from any price discrepancies.

Why Can an ETF’s Market Price Differ From the NAV?

The price of an ETF may deviate from the NAV of the ETF due to changes in the supply or demand at any point in time. The market price will typically exceed the NAV if the fund is in high demand with low supply. The NAV will generally be higher if the fund has a high supply with little demand.

What’s the Difference Between a Mutual Fund and an ETF?

Mutual funds and ETFs are similar in many ways but ETFs tend to offer lower expense ratios and they’re more flexible in trading. They’re also more tax-efficient. You can use both types of funds and segregate them into separate accounts for diversification.

What Is the Main Difference Between Market Price and NAV?

The ETF market price is the price for which the ETF can be bought or sold on exchanges during trading hours. The NAV is the closing price and value of each ETF holding based on the share’s portion of the fund’s assets at the end of the trading day.

The Bottom Line

Market price and the net asset value work in tandem to determine ETF prices. Market price is the price at which ETF shares can be bought and sold during trading hours. The NAV is an equation that involves adding up the total of a fund’s assets and then subtracting liabilities and dividing the result by the number of outstanding shares.

Working knowledge of both is important to investors because redemption mechanisms create arbitrage opportunities that can keep price discrepancies between the two at a minimum.

Disclosure: Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.