What is the difference between NAV and market price?

The NAV finance market is expected to play an important role in the evolution of financial markets, particularly as it currently represents only 2% of private equity assets under management. By 2025, some analysts predict that the NAV financing market could triple, potentially reaching $300 billion.

As an investor in mutual funds and exchange-traded funds (ETFs), to make an informed decision, you must understand the differences between net asset value and market price.

In this article, we will explore the meanings of NAV and market prices of funds, how they are calculated, the factors that affect their values, and how you can interpret them.

We will also discuss some unique cases and how you should invest in ETFs. Read on to know more!

What is net asset value (NAV)?

Mutual funds and exchange-traded funds (ETFs) are quoted by their net asset value. It is quoted on a per-unit basis. It can be calculated as the total assets minus the total liabilities. So, the formula for a fund is as follows:

Net asset value NAV=Total assets-Total liabilities / Total outstanding fund units

Fund houses receive a fund management fee to cover their operational expenses. This fee is higher for actively managed funds than for index funds. In an actively managed fund, the manager will actively look for investment opportunities whereas in index funds, the money is invested in the underlying assets of the index tracked by the fund.

When you see a fund’s NAV, the fund management fee has already been deducted. You may think of fund management as one of the liabilities owed just like a business owes salaries and wages to its employees.

Because of the fund management fee adjustment, index fund returns may be slightly lower than the returns of the index being tracked.

Calculation example

Let us assume that the US stock market has just closed and we want to find the NAV of the EQV Emerging Leaders ETF. Its details are as follows:

Total outstanding units	1 million
Total assets	$600 million
Total liabilities	$250 million

Based on our formula, NAV = $600 million – $250 million /1 million
= $350

Understanding NAV change timing

A fund is updated after every market close to incorporate all changes in the values of total assets and liabilities.

The NAV of a fund’s units will change when there is a change in the value of the underlying assets and liabilities. So, when the value of the total liabilities increases, the NAV falls, and a decrease leads to a rise.

Similarly, when total assets increase in value, the NAV increases, and a decrease in total assets leads to a decline

Interpret the NAV – Insights & Considerations

A fund’s NAV is its main performance indicator. As an investor, you would want to see a rise in the NAVs of funds you hold. If you are interested in a particular fund, you should find out how it performed in similar economic and market conditions before.

Such analysis is usually easier with index funds since active fund managers learn from their oversights and make changes to the fund’s strategies.

For instance, you may want to invest in a bank index ETF since you believe that banks and financial institutions are likely to do well since regulations are being relaxed. However, you must check what happened the last time regulations were relaxed.

Thus, historical NAVs help you verify your investment ideas.

What is the market price of an ETF?

The market price of an ETF is the price at which sellers and buyers are willing to enter into a transaction for the said ETF. Like mutual funds, an ETF’s NAV is updated after the market closes. However, while the markets are open, the price of an ETF depends on the forces of demand and supply.

When should you buy an ETF?

ETFs are assets suitable for long-term investment and you should invest in one only when you are confident that it will provide the necessary returns in the long term, either through an increase in its NAV or from the dividends distributed.

Once you have identified an ETF for long-term investment, you can optimize your returns by buying it when the market price is lower than the NAV.

How does the redemption mechanism affect market price?

Large institutional investors called authorized participants (APs) have access to a redemption mechanism where they can redeem a large block of ETF units and receive the underlying stocks and securities from the fund house. This creates arbitrage opportunities and ensures that the ETF market price stays close to the NAV.

An arbitrage opportunity is an opportunity to make profits by buying something for a low price and instantly selling it at a high price. Such opportunities occur when the same asset is priced differently in two or more markets.

Let us consider how this will affect ETFs trading at premiums and discounts.

ETF trading at a discount

In this situation, the underlying assets of an ETF are more valuable than its market price. So, APs will stock up on that ETF’s units and redeem them for the underlying stocks and securities.

Then, they can sell these assets and pocket the difference between the NAV and the market price.

In this process, the demand for the ETF’s units and the supply of the underlying assets will increase in the market. As a result, the ETF’s market price will rise and the prices of its underlying assets will drop.

ETF trading at a premium

Here, the ETF’s market price is higher than its underlying assets. So, APs can buy up the underlying assets and sell them to the fund house in exchange for ETF units. The APs can now sell these ETF units in the market for a profit.

Through these transactions, the demand for the underlying assets and the supply for the ETF units will increase. As a result, the price of the underlying assets will increase, and the market price of the ETF will decrease.

Because of how these adjustments play out, typically, an ETF’s market price will not stray too far away from its NAV.

International ETFs

Now, let us consider a special case where an ETF’s NAV may change multiple times after markets have closed. Suppose an ETF invests in companies listed on foreign stock exchanges in completely different time zones. Then, the value of its underlying assets will change when the foreign stock exchanges are open for trading.

As a result, the NAV of the ETF will change multiple times after the market in its home country closes.

For instance, Nasdaq opens at 9:30 AM and closes at 4:00 PM Eastern Time. However, the National Stock Exchange of India opens at 11:45 PM and closes at 6:00 AM. So, if you own an ETF that invests in Indian companies, its NAV will change multiple times overnight since the Indian stock market was open.

Eqvista – Your Companion for Sound Financial Decisions

Since the NAV is adjusted for fund management fees, index fund returns are lower than the returns of the index being tracked. Any change in the value of underlying assets and liabilities will affect the NAV.

The market price of an ETF is the price at which it is being bought and sold in a market. Because of the redemption mechanism, APs have arbitrage opportunities whenever an ETF’s market price is at a premium or discount to its NAV.

When APs take advantage of their arbitrage opportunities, they affect the demand and supply of ETF units and their underlying assets. As a result, the market price of ETFs is corrected to the NAV.

The NAVs of ETFs investing in foreign assets may change multiple times overnight since the market for these assets will open after the market closes in the home country .If there is an ETF you are interested in and its market price is at a discount to the NAV, you could buy it before the price corrects.

To build a portfolio that aligns with your financial goals and risk tolerance, you may invest not only in mutual funds and ETFs but also in stocks, bonds, derivatives, and private equity. However, when a portfolio contains a broad mix of assets, particularly complex ones, determining its value can be challenging. Eqvista offers portfolio valuation services to address this issue, providing the insights needed for informed decision-making and accurate financial reporting. Contact us to learn more!