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What is Net Asset Value (NAV), and how does it relate to ETF pricing? ​

The Net Asset Value (NAV) of an ETF is the per-share value of its underlying assets minus any liabilities. NAV is calculated daily by taking the total value of all assets in the ETF’s portfolio, subtracting any liabilities, and dividing by the number of shares outstanding.

NAV = Total Value of Assets - Liabilities : Number of Shares Outstanding

How NAV Relates to ETF Pricing

While NAV provides the baseline value of the ETF’s assets, ETF shares are traded on exchanges throughout the day, which means the ETF’s market price can fluctuate above or below its NAV depending on real-time supply and demand.
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  1. NAV as a Benchmark: NAV acts as an anchor value, giving investors an idea of the fair, intrinsic value of the ETF’s holdings at the end of each trading day.
  2. Intraday Market Price: The market price of an ETF is what investors are actually paying for shares in real-time. It reflects current demand and supply for the ETF on the stock exchange and often varies slightly from NAV throughout the trading day.
  3. Role of Authorized Participants (APs):
    • To keep the ETF’s market price close to its NAV, authorized participants (large financial institutions) buy or sell shares directly from the ETF provider through a process called creation and redemption.
    • When demand drives the ETF price above its NAV, APs can create more shares, increasing supply and pushing the price back down.
    • Conversely, if the ETF price falls below NAV, APs redeem shares to reduce supply, pushing the price up.

Premiums and Discounts to NAV
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  • Premium: If an ETF’s market price is higher than its NAV, it’s trading at a premium. This indicates high demand relative to the underlying asset value.
  • Discount: If an ETF’s market price is lower than its NAV, it’s trading at a discount, which may happen in periods of low demand or illiquid underlying assets.

Intraday Indicative Value (IIV)

Most ETFs publish an Intraday Indicative Value (IIV) every few seconds during trading hours. This gives an updated estimate of the ETF’s NAV based on the current values of its underlying assets. It helps investors gauge the ETF’s real-time value relative to its market price.

​Summary

NAV provides the baseline value of an ETF’s holdings and is recalculated daily. The ETF’s market price, however, fluctuates based on supply and demand, potentially trading at a premium or discount to NAV. Authorized participants help keep the ETF’s market price close to its NAV by creating or redeeming shares, providing stability and making ETFs more efficient for investors.
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