What is the NAV?
For any investment in an ETF we can assess its “fair value” by comparing the market price for units (ie the price quoted on the ASX at which you can buy or sell) with the ETF’s “net asset value” or “NAV” per unit. The NAV is essentially the market value of the ETF’s component assets (eg shares in the case of an equities ETF) minus management fees, expenses and any other liabilities. The NAV should be an accurate appraisal of the real value of the assets of the fund and can be a great guide as to whether the market price for the ETF quoted on the ASX is over or underpriced.
How to work out the NAV
Imagine an ETF with 100 million units on issue, with each unit trading on the ASX at a current price of $1 per unit. If the units are trading in line with their net asset value, this means that the net value of the assets in the ETF will be exactly equal to $100 million.
After allowing for a small margin between the buy and sell price (known as “the spread”), if the units are trading above $1 per unit then the units are said to be trading “above fair value”, whereas if the units are trading below $1 per unit then the units are said to be trading “below fair value.”
In our BetaShares Academy companion piece on ETF liquidity we showed how the “open-ended” nature of ETFs means the units should trade closely in line with the “net asset value” of the fund. In contrast, we showed how a “closed-ended” investment – like a share in a company – can and often does trade above or below “net asset value” simply due to changing supply and demand.
The difference between the NAV and iNAV
To help ETF investors assess whether an ETF’s market price is in line with the “net asset value”, most ETF issuers provide a real time indication of net asset value. Because this calculation changes in real-time, the calculated number is normally called the “iNAV” – an abbreviation for “indicative net asset value.”
The iNAV calculation is normally provided by a third-party calculation agent, who has access to the prices of the ETF’s underlying securities and assets. The calculation agent uses market data feeds to determine the current market value of the assets of the ETF. This provides an investor with an independent indication of the ‘fair value’ of the ETF – in real time.
The iNAV is very helpful for investors when it comes to trading ETFs. Potential investors can simply compare the “iNAV” to the price at which they can buy or sell ETF units on the market – if the values are close then the investor can elect to trade at that price. Of course, all ETFs (and other investments like shares or unlisted managed funds) are subject to a “spread” between the bid and offer price. When you assess how closely an ETF unit is trading compared to its iNAV, you should always take account of this bid/offer spread. The iNAV then, is a very helpful tool in helping investors trade ETFs with confidence that they are getting ‘a fair deal’.