Net asset value definition

A fund’s net asset value (NAV), refers to the underlying value of its holdings if they were all to be immediately sold, usually divided by the number of shares in circulation.

So if an ETF held 10 shares each worth £10 each, and a further 10 shares worth £20 each then the NAV of the ETF would be (£10 x 10) + (£20 x 10) / 20 = £15.

It’s a term which has long been associated with mutual funds, and is now applied to exchange traded funds (ETFs) as a measure of whether their trading price is at a premium or a discount to the value of their underlying constituents.

NAV example

Say, for instance, that the iShares FTSE 100 UCITS ETF has a NAV of $6000. If you sold all of the FTSE 100 equities it contains, then you would expect to receive $6000. If the iShares FTSE 100 ETF was trading at a price of $5990/92, then the ETF would be trading at a discount to the NAV. This would present an opportunity for arbitrage. 

INAV versus NAV

NAV is typically calculated at the end of each day, but every 15 seconds throughout the day the Intraday Net Asset Value (INAV) is also calculated, which significantly reduces arbitrage opportunities and ensures that an ETF’s NAV remains tied to its trading price.

ETFs are open-ended, so if a significant arbitrage opportunity arises an authorised participant may be able to capitalise on it and either redeem or create new shares in the ETF from the ETF issuer. It is unlikely, however, that retail investors will be able to take advantage of this.