Definition of the discount on the net asset value

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What is the discount on the net asset value?

A discount to net asset value is a price situation that occurs when an exchange-traded fund (ETF) or a stock market price of a mutual fund is lower than its daily net asset value (NAV). There are several factors that can trigger a haircut, including when the market has a pessimistic outlook for the underlying holdings of a fund.

The discount to net asset value can be compared to the premium to net asset value.

Key points to remember

  • A discount to net asset value refers to when the market price of a mutual fund or ETF is trading below its net asset value (NAV).
  • A discount to the net asset value is most often due to a downside outlook on a fund’s securities.
  • Since the net asset value of a fund represents only the total value of the fund’s assets at the end of the day, exchange-traded funds have a great deal of flexibility to fluctuate relative to their net asset value.

Understanding the discount to net asset value

A discount to net asset value can occur with closed-end mutual funds and ETFs because both of these investments trade in the open market and calculate a daily net asset value. A discount on the net asset value occurs when the market price is lower than the most recent net asset value. A haircut often indicates that the market is generally bearish on the investments in the fund and the potential of the fund company to generate returns.

The net asset value of a fund is calculated after the close of each trading day. It is considered as a forward price NAV since it takes into account all the transactions that have taken place since the price was calculated the day before. Net asset value is the value of the fund’s total assets at market close, less the fund’s liabilities, divided by the total number of shares outstanding.

Closed-end funds and ETFs trade on exchanges with transactions occurring at a market value, an arbitrary price determined by market participants. When the fund trades above its last listed net asset value, it trades at a premium. When it trades below its last traded net asset value, it is trading at a discount.

Fund companies often provide historical records of a fund’s premium and discount transactions.

Benefit from a discount on the net asset value

A fund traded at a discount to net asset value offers an opportunity for profit. A haircut indicates that investors, perhaps rightly or wrongly, find that the securities in the fund are valued below their aggregate net asset value. This can happen throughout the day due to the variation in bid-ask spreads and the fall in the price of the underlying securities due to negative news in the market, among other things.

In many cases, a premium or discount may be due to slight variations in the market price of the securities within the fund. NAV is calculated once a day while securities trade almost 24 hours a day around the world.

Closed-end funds tend to trade with a higher volatility of their net asset value than ETFs. This is because ETFs have allowed participants to actively track stocks and take action to bring the open market price closer when it deviates from the net asset value.

Closed-end funds do not have such mechanisms and offer greater arbitrage opportunities. If a discount occurs, investors can take advantage of the discounted price and also gain yield benefits from a lower price on the income-producing securities.

Special considerations

Most closed-end fund managers report both today’s market price and net asset value in their marketing materials. They also often provide historical records of market premium and discount levels relative to NAV.

The Guggenheim Enhanced Equity Income Fund provides an example. On December 13, 2017, the fund’s price was $ 8.97, compared to a net asset value of $ 9.15, which resulted in a discount of -1.97%. On the same date, the fund also posted an average discount over 52 weeks of -4.04%.


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