How to Calculate the Value of an ETF

Exchange traded funds, better known by the acronym ETFs, are a good way to gain exposure to several individual stocks without taking positions in any one of them on an individual basis. Unlike mutual funds, ETFs trade throughout the day, just like the underlying stock holdings.

So, while investing in an ETF is a good way to get broad exposure to stocks, bonds, or commodities without taking on specific risk, calculating performance may be a bit tricky. 

Net Asset Value

Both mutual funds and ETFs calculate the net asset value (NAV) at 4 p.m. Eastern time each trading day. The NAV is the value of each share measured by the value of all the fund’s underlying holdings at their closing prices. However, because the ETF trades throughout the day, there are times when the NAV and the actual market price differ, although the differences tend to be minuscule.

Therefore, for calculation purposes, the most readily available measure to use is the NAV, but if you need to calculate more precise performance, then you can use the intraday or indicative net asset value (iNAV), if available. The iNAV reports the net asset value approximately every 15 seconds throughout the day, but instead of using the closing price, it reflects the current price.

One of the benefits of investing in an ETF is that it is often actively traded, which should compensate for the minimal dispersion between the actual bid/ask spreads and traded bid/ask spreads that make up the variance between market value and NAV.  

Calculation

At any given moment, the market price of an ETF depends on the supply (selling) and demand (buying) in the market. However, the net asset value of the portfolio of stocks that the ETF represents matters, since if the market price rises or falls significantly from the NAV, then institutional investors will engage in creations and redemptions that arbitrage the price back closer to its NAV.

Therefore, we can assume that the difference between an ETF's market price and its NAV will be very small, if any.

Let’s consider an example of an investment in a hypothetical ETF simply called “A.” Say the price of ETF A is $100 and you buy 50 shares for a total cost of $5,000 ($100×50). Three months later, the price is $115. Your 50 shares are now worth $5,750 ($115×50) for a profit of $750 ($5,750-$5,000); and the holding period return is ($5,750-$5,000)/$5,000=15%. The NAV in many cases will be the same as price, but it may differ. However, the price that determines how much you get for your shares is the ETF price and not the NAV.

So how, then, is an ETF’s daily NAV computed? This value is taken from the most recent closing prices of the holdings of the ETF (on a weighted basis) plus any cash that it holds. Then, deduct any liabilities that the ETF may have on its balance sheet and divide that amount by the number of ETF shares outstanding.

NAV =  (assets - liabilities)/ETF shares outstanding

The Bottom Line

ETFs are a way to gain broad exposure to an asset class such as stocks, bonds, or commodities. As with mutual funds, the net underlying value (NAV) of an ETF is calculated at 4 p.m. every day, but an ETF's iNAV, or intraday NAV, is calculated every 15 minutes throughout the day as well. To find the daily NAV of an ETF, subtract the liabilities from the fund's assets and divide by the number of ETF shares outstanding. Institutional investors step in to buy or sell when the ETF price diverges too much; this arbitrage tends to keep the price tightly aligned with the NAV.