An ETF’s net asset value (NAV) is calculated using the most recent closing prices of the fund’s assets and the total cash in the fund on a given day. The NAV of an ETF is computed by adding the fund’s assets, including any securities and cash, subtracting any liabilities, and dividing the result by the number of outstanding shares.
These data elements, including the fund’s holdings, are updated on a daily basis. An ETF’s openness is typically highlighted as a major benefit. Mutual funds and closed-end funds are not required to report their portfolio holdings on a daily basis. A mutual fund’s NAV is updated regularly, but its holdings are only revealed once a quarter. A closed-end fund has a daily or weekly NAV and normally reveals its assets every quarter. You can see the assets and liabilities of an ETF at any moment. This openness aids in the prevention of style drift in these items.
Is the NAV of an ETF real-time?
Demand, supply, and trading activity on the exchanges all influence these prices. However, how do you know if the price you see on Kite is a fair price for an ETF? This is where the Net Asset Value (NAV) enters the picture.
Net asset value (NAV)
An ETF, like a mutual fund, has a Net Asset Value at the end of the day (NAV). To refresh your recall, NAV is the total worth of all the assets in the fund, including yours. NAV is calculated using the formula NAV = (Value of total assets expenses)/number of shares (units). However, keep in mind that an ETF trades in real time, whereas NAVs are only released at the end of the day. So, how can you know if the price you’re paying for an ETF is current and fair? Then there’s iNAV.
Intraday or indicative net asset value (iNAV)
Because ETFs trade in real time, you’ll need a reference point to determine whether the market price you see on your trading platform is accurate, and the indicative or intraday NAV (iNAV) provides that reference point. Every 10-15 seconds, AMCs calculate this and publish it on their websites. iNAV = total ETF shares in the creation basket divided by last traded price of all assets in the ETF basket X number of shares in the ETF creation basket + cash component (i.e. cash not deployed in the ETF). Simply put, this is a real-time NAV that you may use as a fair value reference to compare to the current market price on stock exchanges.
Creation unit
You can buy units directly from the AMC, just like you may buy ETF units on the stock exchange. Later on, I’ll explain why you’d want to do that. However, unlike the exchanges, the AMC does not allow you to buy one or two units directly. The AMC determines the creation size, and you can only produce and redeem units within that amount. A creation unit is nothing more than a representative basket of all securities proportionate to the underlying index. The ICICI Nifty 50 ETF, for example, has a creation unit size of 50,000 units, which is worth over Rs 80 lakhs as of this writing. To buy all of the stocks in the Nifty 50 in the same weight, you’ll need 80 lakhs.
Market makers and authorized participants (APs)
In the ETF ecosystem, there is another entity called market markers or authorized participants, which is different from mutual funds. These individuals’ job is to offer liquidity on stock markets. Because there is no real-time trading in mutual funds, you don’t have to worry about liquidity. However, because an ETF trades in real time on the exchange, the AMC appoints market makers to provide liquidity on a continual basis. They accomplish this by giving constant two-way quotes on the exchange, which means they purchase at the bid and sell at the offer, with the difference resulting in a profit. Even if these are tiny amounts, if they continue to do so, it adds up.
Premiums and discounts
Because ETFs trade in real time on exchanges, their prices are influenced by demand and supplyliquid ETF prices, for the most part, trade in line with the ETF’s NAV. However, the price of an ETF can sometimes diverge from its NAV, especially during periods of high market volatility. A premium is when the price of an ETF is higher than its NAV, and a discount is when the price is lower than its NAV.
Tracking error
The annualized standard deviation of the difference between the ETF NAV and the index it monitors is known as tracking error. To put it another way, it demonstrates how closely an ETF mimics its underlying benchmark. For example, if the Nifty 50 returned 10% and the Nifty ETF returned 9.8%, the tracking error would be 0.2 percent. Because they have an expense ratio and the index does not, an ETF or index fund will have lower returns than the index.
An ETF or index fund with a reduced tracking error is better at tracking the index. But, as we’ll see later, this isn’t a particularly intuitive metric to grasp.
With these concepts in mind, let’s get back to the concept of creation and redemption mechanism
The creation and redemption mechanism is significant for a number of reasons. For one thing, you don’t have to buy an ETF on the stock exchange all of the time. If you’re buying in multiples of the creation unit size, buying directly from the AMC is the way to go because buying large amounts on the exchange can result in liquidity concerns and effect expenses.
So, in the previous example, the ICICI Nifty 50 ETF has a creation size of around 80 lakhs. If you’re investing in multiples of 80 lakhs, you can contact ICICI directly and they’ll create units for you, in this case 50,000, and credit them to your demat account. At the iNAV, the AMC will produce units. You can either redeem them by transferring the ETF units to ICICI and having the money credited to your bank account, or you can acquire the underlying shares instead of cash.
The second reason for the importance of the creation and redemption mechanisms is for ETF arbitrage. ETFs can trade at premiums and discounts to the NAV, as I explained previously. Market makers are critical players in the ETF ecosystem because they are in charge of adjusting premiums and discounts. This is accomplished through the creation and redemption process.
ETFs typically trade near their NAVs. Here’s how Nifty BeEs, SBI Nifty ETF, ICICI ETF, and Nifty 50 compare.
When is the NAV of an ETF calculated?
The value per share is the most common way to express NAV. Even though the values of these underlying securities may be hours apart if they trade in different time zones, an ETF’s official NAV is determined once a day, based on the most recent closing prices of the underlying securities.
How is the NAV determined?
The total worth of all cash and securities in a fund’s portfolio, minus any liabilities, is divided by the number of outstanding shares to arrive at the NAV. The NAV computation is significant because it determines the value of a single fund share.
How do I find out what my ETF iNAV is?
The transparency of ETF investing has long been praised. What investor, after all, doesn’t want to know what they own and how much it’s worth?
For decades, mutual funds have provided that information in the form of net asset value (NAV), but only at the end of each trading day. For ETF investors, who rely on up-to-the-minute pricing to assess their intraday trading possibilities, that’s far too uncommon.
One technique of determining that point of reference is to use the intraday net asset value (“iNAV”). iNAV is a tool that calculates an ETF’s intraday indicative value based on the market values of its underlying holdings. The listing exchange calculates the value, which is subsequently broadcast to the public every 15 seconds.
The calculation basket for an ETF is the first step in computing its iNAV. An ETF shareholder’s residual ownership in the fund’s underlying securities is represented by the calculation basket, which is a basket of securities. It’s basically a representation of the value of a single ETF share.
The calculation agent multiplies the last available price of each asset in the calculation basket by the number of shares of that security in the calculation basket to arrive at the iNAV. The totals are totalled, cash components are added, and liabilities are deducted after this for each security in the computation basket. The calculation agent divides the final result by the number of ETF shares in a creation unit to arrive at a “per share” value.
The resulting index, iNAV, is a wonderful place to start if you’re thinking about trading an ETF intraday. Remember that iNAV represents an ETF’s “fair” pricing, thus paying significantly more or receiving substantially less than iNAV is generally not a good idea.
Despite its usefulness for intraday trading, iNAV has some flaws. Let’s look at some of the iNAV calculation’s drawbacks.
Pros of ETFs
- The price is low. ETFs are one of the most cost-effective ways to invest in a diversified portfolio. It might cost you as little as a few dollars for every $10,000 you invest.
- At internet brokers, there are no trading commissions. For trading ETFs, nearly all major online brokers do not charge any commissions.
- Various prices are available throughout the day. ETFs are priced and traded throughout the trading day, allowing investors to react quickly to breaking news.
- Managed in a passive manner. ETFs are typically (but not always) passively managed, which means that they merely track a pre-determined index of equities or bonds. According to research, passive investment outperforms active investing the vast majority of the time, and it’s also less expensive, so the fund provider passes on a large portion of the savings to investors.
- Diversification. You can buy dozens of assets in one ETF, which means you receive more diversity (and lower risk) than if you only bought one or two equities.
- Investing with a purpose. ETFs are frequently centered on a specific niche, such as an investing strategy, an industry, a company’s size, or a country. So, if you believe a specific field, such as biotechnology, is primed to rise, you can buy an investment centered on that subject.
- A large investment option is available. You have a lot of options when it comes to ETFs, with over 2,000 to choose from.
- Tax-efficient. ETFs are structured in such a way that capital gains distributions are minimized, lowering your tax bill.
Cons of ETFs
- It’s possible that it’s overvalued. ETFs may become overvalued in relation to their assets as a result of their day-to-day trading. As a result, it’s likely that investors will pay more for the ETF’s value than it actually owns. This is a rare occurrence, and the difference is generally insignificant, but it does occur.
- Not as well-targeted as claimed. While ETFs do target specific financial topics, they aren’t as focused as they appear. An ETF that invests in Spain, for example, might hold a large Spanish telecom business that generates a large amount of its revenue from outside the country. It’s vital to evaluate what an ETF actually holds because it may be less focused on a specific target than its name suggests.
How can ETFs maintain their NAV proximity?
The redemption mechanism aids in the alignment of market and NAV values. During the trading day, the AP can quickly arbitrate any differences between the market value and the NAV. The market value of ETF shares fluctuates during the trading day. If the market value of an ETF exceeds its NAV, the AP can intervene and buy the ETF’s underlying constituent components while selling ETF shares.
If the ETF market value falls too much below the NAV, the AP can acquire the ETF shares and sell the underlying components. These possibilities can give the AP with a quick, relatively risk-free profit while maintaining the values close together. There may be numerous APs for an ETF, guaranteeing that any price disparities are arbitraged away by more than one party.
When does NAV get calculated?
The price of a mutual fund, or its net asset value (NAV), is determined once a day, after the stock markets in the United States shut at 4 p.m. Eastern Standard Time (EST). While there is no set timeframe for mutual funds to update and publish their NAVs to regulatory bodies and the media, they usually do so on a monthly basis.
What is the distinction between NAV and market returns?
- The net asset value (NAV) return is a method of calculating the success of an ETF or mutual fund over time by examining the value of its components.
- Instead of using the fund’s market value change or total return, a NAV return considers the fund’s net asset value movement over time.
- Because NAV is calculated at the end of each trading day, it can differ from a fund’s market price. Securities held within a fund trade throughout each trading day.
Which NAV is better on the high or low end?
When it comes to mutual funds, most people tend to aim high and shoot low. This is why mutual funds with a high net asset value (NAV) have a bad reputation among investors. A fund with a high NAV is regarded as expensive and, incorrectly, as providing a low return on investment. Instead, you favor mutual funds with a low net asset value (NAV). Because you assume that having more MF units will result in bigger earnings. However, there is more to it than meets the eye. So keep reading to find out if the price of NAV affects your earnings.
Investing in a mutual fund, regardless of whether it has a high or low NAV, is all about performance. You have Rs. 5,000 to invest, for example. Scheme A has a NAV of Rs 500, while Scheme B has a NAV of Rs 100. Both schemes have similar portfolios. You purchase 10 of the first scheme and 50 of the second scheme. Scheme A’s NAV would rise to Rs. 550 if both schemes grew by 10%, whereas the other scheme’s NAV would rise to Rs. 110. In both scenarios, your investment would have risen as follows:
All that the following example illustrates is that if the mutual fund schemes’ portfolios are identical, the NAV should be mainly ignored. Returns have little to do with the cost of purchasing a mutual fund plan. The most important factor is performance.
Besides, there are a slew of other considerations that outweigh NAV. The NAV should preferably not be used to calculate the returns on your mutual funds. Expertise of the fund management, prior performance, and expense ratio are only a few examples.
- The quality of assets in a mutual fund is determined by the fund manager’s skill. As a result, the better the fund manager, the more likely the mutual fund scheme would do well.
- The expense ratio has an impact on a fund’s performance. It includes, among other things, management fees, administrative fees, and operating expenditures.
- Though previous performance cannot guarantee future results, it can provide information about a mutual fund scheme’s track record.
If you want to invest in mutual funds, systematic investment plans (SIPs) are a great option. You may completely explore compound interest’s possibilities. SIPs also offer the ability to use rupee cost averaging to offset volatile NAVs.
They acquire more units when the NAV is low and less units when the NAV is high since the SIP amount is pre-determined. As a result, you don’t have to be concerned about the time of your investment. You also don’t have to be concerned about NAV changes because the purchase price will be the average of the high and low NAVs.
As a result, while purchasing a mutual fund plan, the NAV should not be the major consideration.