What is an ETF’s Net Asset Value and ‘iNAV’?

Let’s consider a hypothetical fund named ABC ETF. This product has the following components:

• Total value of its assets (cash, shares, bonds, etc.): $1,000,000
• Liabilities (fees, expenses, etc.): $50,000
• Number of units outstanding: 50,000

Using the formula for NAV shown above, we substitute the values as follows:

• $1,000,000 (ETF assets) – $50,000 (ETF liabilities) = $950,000 / 50,000 (units outstanding)
• NAV = $19 per unit

In this simplified example, the NAV of ABC ETF is $19. This means that, according to the fund’s assets minus liabilities, each unit is theoretically worth $19.

Picture a scenario where the NAV of the ABC ETF stands at $19 at a specific time, yet its actual trading price on the share market is $20, representing a 5.3% premium above its underlying value.

This discrepancy offers a reliable reference point for assessing whether you are paying the true value of the ETF or potentially overpaying (or underpaying) for its underlying assets. In this example, if a buyer were to purchase ABC ETF, they risk overpaying to invest in the fund based on its NAV.

Locating the NAV of an ETF is thankfully far less cumbersome than determining the value of a car or house. The NAVs for Betashares ETFs are readily available on the individual fund pages. For each product, investors can find the following information, highlighted in the subsequent screenshot:

• Under ‘pricing information”, the NAV per unit.
• Downloadable NAV history, offering a spreadsheet of closing NAV data for each day the ETF has traded since inception.

This accessibility ensures that investors can stay informed about the fund’s value and track its historical NAV trends.

While mechanisms are in place to ensure the alignment of the unit price of ETFs with their NAV over time, the best way to use this information is to check the NAV before making a trade. This practice ensures that investors are paying fair value for ETFs they want to invest in.

Take for example the Betashares Australia 200 ETF (A200), which concluded trading at $116.78 on November 27, 2023, with a NAV of $116.74.

Recognising that an ETF carries liabilities such as fees and expenses, it is customary for the NAV to be slightly below the share price. However, if the variance becomes significant, it serves as a signal to investors, indicating whether the ETF is trading at a premium or discount and prompting a closer examination.

In certain circumstances, an ETF may exhibit a noticeable premium or discount to its NAV, and this shouldn’t immediately signal operational deficiencies within the ETF.

One scenario is during periods of extreme market volatility, where the swift movement of stock and bond prices can cause the NAV of a given ETF to lag behind the true value of its underlying assets. This discrepancy is a natural outcome of the rapidly changing market conditions and should stabilise when volatility fades.

Another challenge arises when an ETF on the ASX tracks an international exchange, such as the Betashares FTSE 100 ETF (F100). Due to differing operating hours between the London Stock Exchange (LSE) and the Australian Securities Exchange (ASX), the unit price and NAV may diverge and the NAV may appear “stale” during ASX hours when markets in Europe are closed.

To navigate these dynamics, consider the following best practices:

• • Strategic timing: Exercise caution when trading around market openings or closings, particularly within a 30-minute window. These periods often witness heightened volatility, potentially resulting in broader spreads between NAV and market prices.
  • Use limit orders: In volatile markets, opting for limit orders over market orders can enhance execution. Limit orders enable investors to specify the maximum or minimum price at which they are willing to buy or sell, offering greater control over the trade’s execution price.
  • Check the intraday NAV (iNAV): Distinguished from an ETF’s standard NAV, the iNAV provides a real-time measure of the ETF’s value throughout the trading day. This dynamic metric recalculates the NAV based on current market prices, updating multiple times per minute to align with ongoing market movements.

Note: While iNAVs serve as a valuable gauge when executing ETF trades, it’s essential to recognise their limitations. Similar to NAVs, iNAVs may not accurately reflect true value if market prices become stagnant or stale during trading hours.

Although there may be occasional divergences, especially in times of extreme market volatility, investors can take comfort in the fact that ETF NAVs and unit prices are designed to closely align on a day-to-day basis. 

This alignment is facilitated by the “creation/redemption mechanism,” a process involving authorised participants (APs). This is covered in greater detail here.

Typically large financial institutions, APs engage in a contractual relationship with ETF distributors to create and redeem fund shares. 

This mechanism ensures ETF liquidity and maintains a tight correlation between a given ETF’s market price and its true asset value. This distinguishes ETFs from other listed investments, such as listed investment companies (LIC), which lack such a mechanism, potentially leading to prolonged discrepancies between NAV and unit prices.

The NAV stands as an important metric in the world of ETF investing. Understanding its significance empowers investors to gauge the true value of their ETF holdings and make well-informed decisions. While occasional divergences from the unit price may occur, the creation/redemption mechanism ensures that ETF NAVs and unit prices remain closely aligned over time.