An ETF’s net asset value (NAV), represents the total value of its underlying holdings minus any liabilities, divided by the number of shares outstanding. Understanding how the NAV is calculated helps investors make informed decisions and trade more effectively.
The official NAV is calculated once per day, typically after market close. Many ETFs also publish an intraday NAV (iNAV), providing an estimated value throughout the trading day. The iNAV helps investors gauge fair value in real time and understand whether the ETF is trading at a premium (above NAV) or discount (below NAV).
Authorized participants play a central role in aligning the ETF’s market price with its NAV through the creation and redemption process. This process—often conducted in-kind—helps maintain price alignment and tax efficiency.
Investors can monitor an ETF’s historical premiums/discounts, bid-ask spreads, and trading volume to better understand how closely it trades to NAV. These data points help ensure fair execution and minimize transaction costs.
Understanding Bid-Ask Spreads
Every ETF trades with two prices: a bid and an ask. The difference between the two is the bid-ask spread, which represents the cost of immediate execution and is a normal part of trading. Bid and ask prices are maintained by market makers, professional trading firms that provide continuous quotes throughout the day. Competition among market makers typically results in tighter spreads and efficient trading.
Spreads can be influenced by the liquidity of the ETF’s underlying holdings, broader market conditions, and timing—spreads may widen slightly at the open or close of markets.
Using limit orders can help investors manage trading costs more effectively.
For financial advisors, explore our ETF Tool Kit for more information on ETF trading and liquidity.
All investing involves risk, including possible loss of principal.
This material contains general information only and does not take into account an individual’s financial circumstances; is intended to be educational and informative in nature; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision. The information discussed is strictly for educational purposes and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
