As you look for exchange traded funds (ETFs) to purchase for
your portfolio, you need to concern yourself with a
number of factors
. Not least of these is the issue of discounts and premiums.
All ETFs have a net asset value (
), which is calculated by dividing the total value of all the
securities in the portfolio by the number of outstanding
Since ETFs are traded on a stock exchange and priced
continually, it means that the ETF's price is constantly shifting.
Because that price moves freely, a price discrepancy may occur
between the price of the fund and its NAV.
If the price of a fund is lower than its NAV, the ETF is trading
at a "discount." If the price of the fund is higher than its NAV,
the ETF is trading at a "premium." [
How to Examine ETFs for Better Trading.
Here's an example:
If the NAV of an ETF is $30 and the ETF is trading at $25, it's
trading at a discount.
If the NAV is $30 and it's trading at $31, then it's trading at
What does this mean? When you're buying, generally not much. But
when you sell, the movement from the discount or premium will
affect your overall return. The more you trade, the more evident
this impact will be. Buy-and-hold investors may not be as concerned
with this issue. [
How to Find the Right ETF.
For more information on ETFs, visit our
ETF 101 category
section contains many more educational articles like this one!
Check it out.
Max Chen contributed to this article.