Because the underlying securities trade over-the-counter and not on the secondary market like stocks, current prices of these underlying securities may be hard to obtain, which could make it more difficult to quickly identify if an arbitrage opportunity exists. Therefore, a premium or discount may persist in the ETF.
It provides investors a reference point around which they can gauge any offers to buy or sell shares of the fund. If you own 100 shares of an ETF whose NAV is $50, and someone offers $55, you have a solid basis from which to judge their offer.
A discount to NAV surfaces when the market trading price is lower than the most recent NAV. A discount often indicates the market is generally bearish on the investments in the fund and the fund company's potential to generate returns. The NAV of a fund is calculated after the close of each trading day.
A discount to net asset value (NAV) occurs when the market price of shares of a closed-end fund is lower than the fund's net asset value per share. The NAV is calculated by dividing the total value of all the securities in the portfolio, minus any liabilities, by the number of the fund's shares outstanding.
If investment trust shares are trading at a discount to NAV it can give the impression that the shares are cheap because the fund isn't worth investing in. Although this isn't always the case, boards don't want investors to be put off by a discount that is too wide.
Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund's investment objective will be achieved. Closed-end fund shares may frequently trade at a discount or premium to their net asset value (NAV).
According to the noise theory, fluctuations in departures from NAV are caused by changes in investor sentiment. That is, when investors become (irrationally) pessimistic about REITs, the value of REIT shares is pushed below their true, underlying value.
When investing in mutual funds, NAV is not a meaningful indicator of the fund's future performance or suitability. Whether a fund has a high or low NAV should not be the primary factor in your decision-making process. Instead, focus on: Fund consistency in performance over different time periods.
In our opinion, a z-score of less than -2 signals that a fund is relatively inexpensive, and a z-score greater than +2 signals that a fund is relatively expensive. With a z-score of 3.5, this fund would be considered relatively expensive. But this doesn't necessarily mean that the CEF is overvalued.
Compare the ETF's Market Price to the NAV
Compare the market price to the NAV to determine if the ETF is trading at a premium or discount to its NAV. If the market price is higher than the NAV, the ETF is trading at a premium. If the NAV is lower than the price, the ETF is trading at a discount.
Usually, it's due to the trust being in high demand due to its strong track record of outperformance, an in-vogue investment style or a booming sector. Whatever the reason, you'd have to be confident that the trust can continue to outperform and justify its premium .
ETFs may be better than mutual funds for long-term investors who are patient and who can time their fund liquidations. ETFs holding relatively less liquid securities provide investors with lower payoffs during periods of market stress compared to mutual funds anchored on the same index.
An ETF may not match its NAV for many reasons. One common reason US-listed ETFs investing in international stocks may trade at premiums or discounts is time zone differences.
In the second edition of this series, we assess premiums (when an ETF is trading at a higher price than its net asset value or NAV) and discounts (when it is trading at a lower price than its NAV).
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
If you can buy a share at a big discount to its book value (a price to NAV a lot less than 1) then it might be possible to make money from it when business conditions improve. History tells us that this can be a very profitable investment strategy.
A higher NAV isn't inherently better. It reflects the fund's asset value, not its potential returns. Focus on fund performance, growth, and expense ratio based on your investment objectives, horizon, and risk appetite rather than comparing NAV values alone.
For all mutual funds, the price at which you buy, sell, and exchange shares is the “net asset value” per share, also known as NAV.
Higher interest rates can also make REITs less attractive compared to other income-generating investments, such as bonds. Taxed as ordinary income: Dividends from REITs are typically taxed as ordinary income, which can result in a higher tax burden for investors, especially those in higher tax brackets.
The NAV of the mutual fund units is adjusted based on the dividends paid to the investors. After receiving dividends, investors will notice a decline in NAV. If investors choose the dividend reinvestment option here, the number of units held under the scheme will increase.
An ETF's Net asset value (NAV) represents the value of the securities it holds (including cash), less its liabilities, divided by the number of shares outstanding. ETFs trade at market price, which is the price of the last reported trade on the fund's primary exchange. An ETF's market price might be different than NAV.
Investors who value transparency and like to know each position they are invested in may prefer open-end funds over closed-end funds. A financial advisor can help you understand how each may fit into your portfolio based on your investment objectives.
CEFs trade on an exchange. This means that they have a share price, which is set by the market. These 2 prices, the NAV and the share price, are rarely the same, and when they are, it's only by coincidence. The differences between the share price and the NAV create discounts and premiums.
Potential for underperformance: Most ETFs are passively managed, which means they seek to track a benchmark index and will not outperform the benchmark. However, closed-end funds are actively managed, which enables the potential to outperform the market.