What is NAV (net asset value)?
The SEC defines a fund’s net asset value as its total assets minus its total liabilities. The assets are the securities it holds at their current market prices, plus cash and income it is owed; the liabilities are what it owes, such as accrued fees and money due for securities it has bought. Divide the result by the shares outstanding and you get NAV per share, the figure most people mean when they say NAV.
NAV is the price at which a mutual fund deals with its investors: you buy and redeem shares at the NAV per share, plus or minus any fees the fund charges. For an ETF it is a reference value, not the price you trade at. In other countries the same number has another name: in France it is the valeur liquidative, and the market regulator’s rulebook defines it as the fund’s net assets divided by the number of units or shares.
- Net asset value (NAV)
- A fund’s total assets minus its total liabilities. Usually quoted per share: net assets divided by the number of shares outstanding.
- NAV per share
- Net assets divided by the fund’s shares outstanding. The price at which a mutual fund sells and redeems its shares, before any fees.
How is NAV per share calculated?
The fund’s costs are already inside the number: management fees and other expenses are deducted from the fund’s assets a little each day, so NAV is always after costs. You never get a bill; you see a slightly lower NAV. The arithmetic has three steps, shown for fund XYZ in the drawing at the top of the page:
- Add up the assets at today’s prices: securities, cash and receivables come to $505 million.
- Subtract the liabilities: $505 million − $5 million = $500 million of net assets.
- Divide by the shares outstanding: $500 million ÷ 20 million shares = $25.00 a share.
What makes NAV go up or down?
Only one thing changes NAV per share from day to day in a lasting way: the value of what the fund holds, net of costs. If XYZ’s holdings gain $10 million in a day, net assets rise to $510 million and NAV to 510 ÷ 20 = $25.50, a gain of 2.0%, as in the first card of the drawing below.
Money coming in or going out does not change it. If an investor then buys $2.55 million of new shares at $25.50, the fund issues 100,000 shares: net assets become $512.55 million and shares 20.1 million, and 512.55 ÷ 20.1 is still $25.50. The fund is bigger, but each share is worth the same. That is why a fund’s size tells you nothing about its NAV, and why a NAV of $25 is not cheaper than a NAV of $250: what matters is the percentage change.
A distribution does lower NAV, without making you poorer. When the fund pays out $0.50 a share in dividends or capital gains, $10.05 million leaves the fund, net assets fall to $502.50 million and NAV drops to 502.50 ÷ 20.1 = $25.00. You now hold a share worth $25.00 and $0.50 in cash, or more shares if you reinvest. To judge a fund, look at total return, which adds distributions back, not at the change in NAV alone.
- Total return
- The change in a fund’s NAV plus the distributions it paid, usually assuming they were reinvested. The fair way to compare funds.
When is NAV calculated? Forward pricing
A US mutual fund must calculate its NAV at least once every business day, and funds typically do so after the major US exchanges close, at 4:00 p.m. Eastern time, using that day’s closing prices. The fund then sells and redeems shares at the NAV calculated after it receives your order. This is called forward pricing.
So you never know your exact price when you place the order. In the drawing below, an order placed at 11:00 a.m. is filled at the NAV worked out that evening, and an order placed at 5:00 p.m., after the close, gets the next business day’s NAV. Funds and their intermediaries set their own cut-off times, often the market close, so check yours. Forward pricing is deliberate: it stops anyone from buying at a stale price after seeing news that the old price does not yet reflect.
An ETF also calculates a NAV once a day, but its shares trade on an exchange all day at market prices, which is the subject of the next section.
- Forward pricing
- The rule that a mutual fund order is filled at the next NAV calculated after the order is received, not at a price already known.
ETF market price vs NAV: premium and discount
An ETF has two values at once. Its NAV per share is the value of its holdings; its market price is whatever buyers and sellers agree on the exchange at that moment. When the price is above NAV the ETF trades at a premium, and when it is below, at a discount: (market price − NAV) ÷ NAV. With a NAV of $25.00, a price of $25.10 is a premium of 0.10 ÷ 25.00 = 0.40%, and a price of $24.95 is a discount of 0.05 ÷ 25.00 = 0.20%, as in the drawing below.
The gap usually stays small because of how ETF shares are made. Large broker-dealers called authorized participants deal directly with the fund, in big blocks called creation units; the SEC’s guide gives 50,000 shares as an example, which for this fund would be 50,000 × $25.00 = $1.25 million. If the ETF trades above NAV, an authorized participant can deliver the underlying securities to the fund, receive new ETF shares at NAV and sell them at the higher market price; the extra supply pushes the price down. If it trades below NAV, the participant can buy ETF shares cheaply, hand them back to the fund for the underlying securities, and sell those; the reduced supply pushes the price up. What is an ETF shows this process in a drawing.
The mechanism works best when the holdings are easy to trade. Premiums and discounts can widen when the underlying market is closed, as with foreign stocks during US hours, when the holdings trade rarely, as with some bonds, or in a very fast market. The SEC’s bulletin notes that an ETF’s price generally stays close to its end-of-day NAV but may vary significantly. ETF issuers publish the history of premiums and discounts on their websites; check it, and use a limit order, one of the order types, so that you set the price you accept.
- Premium to NAV
- The amount by which a fund’s market price is above its NAV per share, as a percentage of NAV.
- Discount to NAV
- The amount by which a fund’s market price is below its NAV per share, as a percentage of NAV.
- Creation unit
- A large block of ETF shares, often tens of thousands, that authorized participants exchange with the fund for the underlying securities.
- Authorized participant (AP)
- A financial institution, typically a large broker-dealer, with a contract that lets it create and redeem ETF shares directly with the fund.
Closed-end funds: why the price can stay far from NAV
A closed-end fund also holds a portfolio and has a NAV, but it issues a fixed number of shares in a public offering and then lists them on an exchange. It is not required to buy shares back, and there are no authorized participants creating or redeeming shares, so nothing pulls the market price toward NAV. The SEC’s bulletin on these funds says their market price may be greater or less than NAV, and that shares bought at a discount may only be sellable at a discount.
Hypothetical: a closed-end fund with a NAV of $20.00 trades at $18.00, a discount of 2.00 ÷ 20.00 = 10.00%, the third card in the drawing above. That is not automatically a bargain: the discount can last for years or widen, and it can reflect the fund’s fees, its use of borrowed money or doubts about how its less liquid holdings are valued. Closed-end funds are also not required to calculate NAV every business day as mutual funds are, so check how fresh the figure is.
- Closed-end fund
- A fund that issues a fixed number of shares in an offering and lists them on an exchange. Its shares are not redeemable at NAV, so they often trade at a discount or a premium.
What NAV does and does not tell you
NAV is an accounting value, useful for specific questions and misleading for others:
- It tells you what a mutual fund share costs today, and what an ETF or closed-end fund share is backed by.
- It does not tell you whether a fund is cheap. A fund is a basket, and its NAV is simply the basket’s current price; a low NAV per share only means the basket is cut into more shares.
- It does not measure performance alone. Distributions lower NAV, so compare total return over the same period.
- It is only as good as the prices behind it. Holdings that trade rarely are valued by estimate, so NAV for such funds is less precise.
- For an ETF, compare the market price with NAV before trading, and avoid large orders when the gap is unusually wide.