Calculating the value of an ETF

In short: ETFs are wrappers around baskets of securities, such as the 500 stocks of S&P 500. Sometimes the price of the ETF diverges from the average price of its securities, making it expensive or cheap versus its Net Asset Value.

Exchange traded funds are one of the ways investors can gain exposure to several assets without taking individual positions in any of them. ETFs trade throughout the day, similar to their underlying stocks. For example, investing in the SPDR S&P 500 ETF (SPY) gives investors exposure to the 500 underlying assets without the risk of holding each asset.

So how do you value the position then?

The value of both mutual funds and ETFs are calculated using the net asset value (NAV), which uses the end of trading day price for each underlying asset. The NAV of an ETF is equal to the value of each share measured by the value of all the fund’s underlying holdings at their closing price for the day. However, because an ETF trades throughout the day, this measure can only be calculated at the end of the trading day. If you’re interested in calculating a more precise performance, investors can use the intraday net asset value (iNAV).

NAV = (assets - liabilities) / ETF shares outstanding

At a given time, the market price of an ETF is dependent on the intersection of its supply and demand in the market. However, the NAV is an important value because if the market price deviates too much from the NAV, institutional investors will engage in trades to arbitrage the price back closer to its NAV. Therefore, one can assume that the market price of a liquid ETF will often be very close, if not equal, to its NAV.

If there is a discrepancy between the market price of an ETF and its NAV, institutional investors will sell the ETFs and buy the underlying basket of stocks (if the ETF price rises too high above the NAV) and vice versa (if the market price falls well below the NAV).

How is an ETF’s daily NAV computed?

Using the most recent closing prices of the ETF’s holdings (on a weighted basis - individual asset value versus total portfolio value), plus any cash, minus any liabilities that the ETF may have on its balance sheet and finally divided by the total number of ETF shares outstanding.

For example, if the NAV of X ETF is $100, you buy 10 shares worth and then a few months later, the NAV is $115. You have made a profit of $15/share.