Set out why an ETF can trade above or below its NAV
The idea
An ETF's premium or discount is its market price minus its net asset value per share, expressed as a percentage of NAV. Arbitrage by authorised participants usually keeps the gap small, but it can widen when the NAV itself is stale or when creating and redeeming is costly. For funds holding stocks in markets that close before the ETF stops trading, NAV uses old closing prices, so the ETF price reflects news the NAV cannot yet show; the apparent premium or discount is mostly a timing effect rather than mispricing. The trap is reading a premium on an international ETF after a rally in its home market as evidence that the ETF is overpriced.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Exchange-Traded Funds: Mechanics and Applications
- Explain how ETF shares are created and redeemed and what role authorized participants play
- Set out how ETF shares change hands on the secondary market
- Set out where ETF tracking error comes from
- Set out what influences the bid–ask spread on an ETF
- Set out what an ETF costs to hold
- Set out the risks ETFs carry
- Recognise and explain the ways ETFs can be used in a portfolio