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Lesson 3 transcript

How ETFs trade

Investors only usually interact directly with a broker when buying an ETF. But behind the scenes, there are a few other key players also involved in the process:

  • ETF provider (for example, Betashares)
  • Market maker (a financial institution, like Citigroup)
  • Broker (a financial institution, like CommSec)
  • A stock exchange (for example, ASX)

Look at an ETF like it’s a bag of marbles. For example, a collection of 200 individual stocks, including the largest companies listed on the ASX.

The process starts with what’s called the creation mechanism. This involves a market maker who collects the marbles in a bag and passes them on to an ETF manager, like Betashares.

In exchange for the bag, Betashares provides the market maker with ETF units, which are units in the fund. These units are then distributed via brokers on the ASX to investors like you and me.

There are a few key benefits to the creation and redemption process. Firstly, it enables ETFs to have sufficient liquidity. That means they’re easy to sell when you want to.

Secondly, it works to ensure that the value of the ETF stays closely aligned with its underlying assets.

How ETFs are priced

ETF pricing works differently than pricing company shares. There is a limited number of shares in a listed company, whereas the number of units in an ETF can vary.

Company share prices fluctuate based on a number of factors, including supply and demand from investors.

ETFs work differently as they effectively have unlimited availability and prices are calculated according to the Net Asset Value, or NAV. The NAV is the value of an ETF’s underlying assets.

That’s not to say supply and demand don’t affect the value of an ETF – they can. But the effectively unlimited supply and the creation and redemption mechanism of ETFs are designed to ensure that an ETF’s value remains as closely aligned to its underlying investments as possible.

NAV vs market price

It’s important to note that at times an ETF’s NAV may differ from its market price, which is the price at which investors can buy and sell an ETF on the exchange. This is most likely to occur when markets experience significant volatility, including at the start and end of the trading day.

How to check if an ETF is trading at NAV

To help you check whether an ETF’s market price is in line with the NAV, some ETF issuers provide a real-time indication of an ETF’s NAV on their website, shown as iNAV, or indicative net asset value.

Definition summary

Term Explanation
Net Asset Value (NAV) The total value of the holdings of the fund, minus its liabilities and divided by the number of units in the fund.


The NAV is the unit price, or the share price of the ETF itself and is calculated at the end of the trading day, based on the closing market prices of the portfolio’s holdings.

Indicative Net Asset Value (iNAV) A real-time calculation of NAV usually found on an ETF’s webpage
Market price The price at which investors can buy or sell an ETF on an exchange

The ideal time of day to buy ETFs

The first and last few minutes of the trading day are the ASX’s ‘peak-hour’, when there can be significant price volatility.

It’s generally best to purchase ETFs when the market has settled – usually between 10.30am and 3.30pm Sydney time.

Betashares Capital Limited (ABN 78 139 566 868 AFSL 341181) (Betashares) is the issuer. Before making an investment decision, investors should consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD), available at www.betashares.com.au. This information does not take into account any person’s objective’s, financial situation or needs and is not a recommendation or offer to make any investment or to adopt any particular investment strategy. Investors should consider the appropriateness of the information taking into account such factors and seek financial advice. Investments are subject to investment risk, investment value may go down as well as up, and investors may not get back the full amount originally invested. ASIC’s MoneySmart website has useful information for people considering investing. The MoneySmart resources can be found here – https://www.moneysmart.gov.au/investing. ASIC’s MoneySmart website has no affiliation with Betashares.