When looking at an exchange-traded fund (ETF) within AAII’s ETF Evaluator, you’ll notice two different return figures, one based on price and one based on net asset value (NAV). Unlike mutual funds, ETFs are marketable securities with share prices that fluctuate all day according to the buying and selling habits of investors. Because of their tradeable nature, the price paid per share of an ETF may not match the underlying valuation of its assets, or NAV, which is the assets of a fund minus its liabilities. The NAV is calculated once per day after the market close.
In the long term, an ETF’s price return and NAV return will track closely together. However, a spread between an ETF’s price return and NAV return may indicate either a buying or selling opportunity, depending on whether the NAV is trading at a discount or premium to the price.
An ETF’s price return can deviate from its NAV return for several reasons. Within a given day, investors can sour on a particular stock, sector, commodity, investment strategy or even the issuing fund parent company itself. Investor sentiment in reaction to news related to a particular stock or set of stocks can have bullish and bearish implications on an ETF’s price, even though the underlying NAV hasn’t changed yet.
Although individual investors may not have the resources to aggressively take advantage of these premium and discount spreads on particular ETFs the way an institution may be able to, a spread can indicate a broader market trend that may be worth noting.
The diversity of an ETF’s assets also play a role in the potential spread between its price and NAV. ETFs with exposure to a large array of investments may be subject to different types of investor sentiment at the same time. The composition of a fund is available near the bottom of each fund’s Evaluator page.
