How ETFs are Priced: NAV and iNAV in ETFs
In our mutual fund masterclass, we discussed the whole process of the pricing of mutual fund units. Let’s discuss it briefly for the readers who haven’t gone through MF masterclass articles.
Mutual Fund is a pooled investment vehicle that invests the pooled money into a basket of securities. The total value of the underlying basket of securities is the total asset value of the fund. NAV is calculated as follows:
NAV = Total asset value – ExpenseTotal number of units
NAV in ETFs
Mutual Fund NAV is published at the end of the day. Just like Mutual Funds, ETFs are also pooled investment vehicles and they also have end-of-the-day NAV. NAV reflects the true value of the underlying securities in an ETF.
At the same time, ETFs are traded on the exchange and therefore, they have a real-time price which is driven by:
- Prices of the underlying securities and
- The demand and supply of the ETF in the market.
We generally can’t buy or sell ETFs at NAV. We can only buy/sell ETF at its market price (with adjustments for bid-ask spread and market impact). Technically investors can buy or sell an ETF at NAV directly through AMC. But it can only be done in predefined lot sizes (creation units) that tend to be typically large and hence is only viable for institutional and HNI investors. You can learn more about creation units here.
Importance of iNAV in ETFs
Since most investors can only transact at market price, they need some way to assess whether the market price of the ETF reflects the value of the underlying securities. This brings us to the concept of Intraday Net Asset Value (iNAV). iNAV provides an intraday indicative value of an ETF based on the market values (almost real-time) of its underlying holdings.
iNAV serves as a great reference point for investors looking to transact in an ETF. If the market price of an ETF is significantly above iNAV, investors should generally avoid buying that ETF. Similarly, If the market price of an ETF is significantly below iNAV, investors should avoid selling that ETF.
You can find the iNAV of ETFs on the website of the fund house. For example, iNAVs of Mirae Asset ETFs can be found on its website as shown below.
Don’t forget to check the iNAV of any ETF (especially ETFs with low volume) before purchasing or selling them.
Limitations of iNAV in ETFs
Although iNAV is a great reference tool for investors, there are certain limitations. Suppose an ETF trades in a different exchange (time zone) than the underlying securities. For example, a US Equity ETF trading on NSE (say, Motilal Oswal NASDAQ 100 ETF). Prices used for iNAV calculation are previous closing prices of the underlying US securities. In that sense, iNAV may not reflect the “true” value of underlying securities.
FAQs
What is the difference between the NAV and iNAV of ETFs?
NAV of any ETF is calculated at the end of the trading hours based on the closing prices of underlying securities. iNAV, on the other hand, is calculated in real-time throughout the trading day and is based on the current market prices of the underlying securities of the ETF. So, we can say that the NAV of an ETF is static and the iNAV of an ETF is dynamic in nature.
What is the frequency of updating the iNAV and NAV of ETFs?
iNAV of the ETFs is generally updated every 3-5 seconds. On the other hand, the NAV of any ETF is updated once a day.