Yes, it's always nice to get that fat payday at the end of a trade.
It's equally important to know the hows and whats in an exchange
traded fund (
ETF
) trade so that you may make timely and better-informed investment
decisions.
ETFs are listed and traded like stocks, with their own bid/ask
price, and the forces of supply and demand determine the current
value at which someone may buy or sell an ETF,
instructs Jessica Mead for City A.M.
The spread between the bid/ask price mirrors the average spread of
the underlying securities represented in an ETF, along with the
traded volume and number of market makers. [
7 Winning ETF Characteristics.
]
Mead comments that investors shouldn't focus on price alone but
should also use complementary valuation methods. Investors looking
at ETF performance over time as compared to the underlying index
should look over net asset value (
NAV
), remarks Nizam Hamid, head of sales strategy at
iShares
,
BlackRock
's ETFs division.
NAV is the value of each share measured by the value of its
underlying holdings and is calculated by using the closing prices
of the underlying securities on their respective exchanges. The NAV
is particularly useful in evaluating internationally-oriented
funds, since global markets are open at different hours and the
closing price will reflect a fund's value at various points of the
day. The NAV shows the last closing price on the relevant foreign
exchange while the closing price of an ETF is listed as the fund's
last trade on a domestic exchange.
It should be noted that the NAV of funds that distribute
dividends tend to grow when dividends are being paid out and will
drop when the ETF holders are paid. The adjusted NAV of ETFs that
reinvest the dividend is less critical to performance analysis.
Investors who need precise, up-to-date information during the
day should use the intraday net asset value (iNAV) - a measure of
the continuous real-time, fair-value of an ETF calculated by
Deutsche Boerse. The iNAV is available at any data vendor,
including
Google
Finance
, where it can be located by typing ".iv" after the ticker of any
ETF. The iNAV provided added transparency, credibility and
valuation of a fund in real time to investors. It is suggested to
compare the bid/ask price to the iNAV to see if an ETF is being
priced fairly.
For more information on ETFs, visit our
ETF 101 category
.
Max Chen contributed to this article.