An introduction to net asset values


When it comes to value investing, there is an important distinction between the apparent value of an asset and its real value. In the context of mutual funds and exchange-traded funds (ETFs), this distinction is made by looking at net asset value (NAV) and indicative net asset value (iNAV). Both help investors establish a benchmark when selecting ETFs to include in their portfolios.

ETFs have quickly become one of the largest asset classes in financial markets. By 2016, worldwide ETFs assets had exceeded $3 trillion. This figure is expected to reach $7 trillion by 2021 as investors seek to take advantage of the transparency, affordability and tax savings associated with ETFs. Currently, the average daily turnover of some ETFs exceeds the turnover of individual large-cap stocks. For example, ETFs like (TO SPY A), (GDX B+) and (XLF A) record much larger daily volumes than most large-cap volume leaders on US exchanges, including Bank of America (BAC), Cisco Systems Inc. (CSCO), Apple Inc. (AAPL) and Microsoft Corporation (MSFT). Investors can compare and contrast these ETFs using our Head-to-Head ETFs Comparison tool, which allows granular analysis of performance, technical indicators, AT Mexpenses, transaction volume and more.

However, understanding daily trading volume is only one aspect of success ETFs invest. Know the difference between NAV and iNAV can have a much deeper impact on your investment portfolio. For starters, both indicators measure the value of an ETF at different intervals of the day and provide different benchmarks for evaluating investment opportunities. Understanding how these indicators work can also benefit investors in terms of order execution, since the intraday price of an ETF and the price of the fund NAV are highest at the beginning and end of each trading day. Read 6 best practices for execution ETFs Advice commands to improve the quality of your ETFs commercial execution.

In order to get the most out of ETFs, investors need to know a lot about the structure, opportunities, and limitations of these securities. Read 101 ETFs Lessons Every Financial Advisor Should Learn for more.

Understanding NAV

In ETFs invest, the NAV is the sum of a fund’s assets (i.e. its holdings of cash, shares, financial derivatives and other securities) less any liabilities, divided by the total number of shares outstanding (see formula below ). the NAV therefore gives the value per share of a ETFs on a specific date. In North America, a fund NAV is calculated at 4 p.m. ET Monday through Friday.

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Advantages and disadvantages of NAV

the NAV is important because it gives an indication of the fair value of a stock within a ETFs. This gives investors a point of reference against which to evaluate future investment decisions, such as buying or selling shares in the fund. Although it is easy to imagine a situation where someone offers you a significant premium over the NAV price, most ETFs follow their NAV closely because of the creation/redemption mechanism. This mechanism, which explains how ETFs gain exposure to financial markets, provides a one-for-one fair value exchange when a ETFs company creates new shares of its fund through an Approved Participant.

Although extremely useful, a NAV also has significant shortcomings, especially when an ETF’s shares are trading in a different time zone. These time zone differences can make NAV obsolete because it does not take into account fluctuating values ​​in other markets. In this case, the value has changed but the NAV remained the same. For example, the iShares Global 100 ETFs (IOO A) offers exposure to 100 of the world’s largest stocks in both developed and emerging markets, which can make it difficult to NAV calculation on a given day.

Relying on the NAV for trading also has several shortcomings, such as the impact of order size, direction and position of the market maker on the cost of trading. ETF trading cut-off times also vary depending on the fund provider, which increases the cost and hinders the efficiency of trading. NAV trading can also lead to settlement issues in countries or regions where negative interest rates are prevalent, such as Japan or the Eurozone. the FTSE Developed markets ETFs (VEA A) is one such fund that offers exposure to both Europe and Japan, as well as other regions.

Understanding iNAV

More than once a day NAV indicator, investors use iNAV to measure the intraday value of an ETF. The iNAV gives an up-to-date or “real-time” measure of an ETF’s value based on its assets minus its liabilities. As this is an unofficial indicator, it is usually calculated by third-party vendors and released to the market every 15 seconds. The iNAV is calculated by multiplying the last available price of each security in the calculation basket by the number of shares included in the basket (see formula below).

Basic iNav calculation

Advantages and disadvantages of iNAV

While the NAV informs investors of an asset’s value at the end of each trading day, iNAV provides a more frequent snapshot. This makes iNAV very useful for investors looking to buy or sell ETFs.

As the NAViNAV is also limited for ETFs with securities in multiple time zones, such as (IOO A) and (VEA A). This also applies when an Asian security is traded on the New York Stock Exchange, or vice versa. Although 15-second updates may seem like “real-time” information, these broadcast intervals can skew the true value of ETFs during periods of volatility.

To overcome these challenges, some investors use a method called “fair valuation,” which involves using an approximation to determine the best estimate of fair value for securities that are not currently traded. A variation of this method is often used by liquidity providers. For example, a Tokyo-based liquidity provider trading an S&P 500 ETFs while the New York Stock Exchange is closed could use the S&P 500 futures contract as a basis for calculation. The obvious advantage of this approach is that it overcomes the outdated calculations that plague NAV and iNAV indicators. The downside, however, could be significant discrepancies between the “fair valuation” method and the official iNAV due to low liquidity in the futures market.

The essential

As an investor, being aware of NAV vs iNAV can be critical. Despite its flaws, the net asset value of a ETFs indicates how well the fund is positioned in the market. The iNAV, on the other hand, is a useful indicator for investors looking to trade a ETFsalthough they may not reflect true value in the case of funds with holdings in multiple time zones.

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