Exchange-Traded Fund Valuation: Net Asset Value, Indicative Value, Cash, and Shares Outstanding

The value of an exchange traded fund (ETF) depends, of course, on the value of the underlying assets in the creation unit (CU), but determining the value of ETF shares is more problematic than it is with simpler assets, such as stocks, partly because arbitrage is used to keep the price of the ETF shares aligned with the price of the underlying assets. However, various factors limit the effectiveness of arbitrage in setting ETF prices. Dividends are accrued, expenses are paid, and the value of ETF shares deviates from the value of the underlying assets to some extent, depending on their liquidity and whether the underlying assets are trading at the same time as the ETF shares. For instance, many ETFs consisting of international assets will trade at different times from the underlying international assets. Therefore, different indicators are used to determine ETF valuation, depending on the type of ETF, where the ETF and the underlying assets trade, and the available information: net asset value, indicative value, total and estimated cash, outstanding shares, and for certain funds, accrued dividends. The most obvious way to check the value of an ETF is to obtain a price quote, if the fund is actively traded. If it is not, then there are other methods to determine the value of an ETF, and even actively traded ETFs are assessed based on these factors.

Net Asset Value (NAV)

The NAV of an ETF is calculated in the same manner as it is for a mutual fund: by summing the total assets and subtracting the total liabilities, divided by the number of shares outstanding:

NAV = (Assets – Liabilities)/Shares Outstanding

The NAV is the value used to compare it with other funds and to calculate performance statistics, but it may not represent the current value of an ETF, since the component prices change throughout the trading day, but the NAV is calculated only at the end of the trading day.

Indicative Value

The indicative value (IV, aka intraday indicative value, IIV, indicative net asset value, iNAV, indicative optimized portfolio value, IOPV) is calculated by using the most recent prices of the underlying assets rather than the closing prices of the previous day. Indicative value is more useful in assessing the value of an ETF that is traded infrequently. However, sometimes trading anomalies can skew the value. Moreover, IV is only calculated every 15 seconds by the exchange that lists the ETF. Only the last price is given — not bid or offer prices, which limits their value for trading. The value of the IV is also limited for those ETFs that have underlying securities that trade in different time zones, such as ETFs that have international securities, or where trading has halted on one or more of the underlying securities. In such cases, some traders may use an estimated NAV (eNAV), where the IV is adjusted by a specific formula deemed by the traders to be representative of price changes caused by an event that would have a significant effect on the ETF price, such as multiplying the NAV by a percentage change in a representative index. Traders use the eNAV to determine bid and offer prices. The IV is calculated thus:

Indicative Value = ∑ (Last Price × Shares of Each Asset)/CU Shares + Estimated Cash/CU Shares

Cash

Cash changes in an ETF because of dividends, management fees, and from changes in the portfolio, so authorized participants need to know the cash associated with the CU in order to create or redeem a CU. There are 2 cash numbers that are published daily for most ETFs: total cash and estimated cash. The total cash is the amount attributed to each CU in the prior trading day so that creations and redemptions occur at NAV, which prevents dilutions that can be caused by the creation or redemption process. Estimated cash is the amount of cash that is expected to be available at the end of the trading day, and thus, unlike total cash, is a forward-looking number. Fund cash is calculated thus:

Total Cash = Outstanding Shares/CU Shares × Total Cash

Cash per ETF Share = Total Cash/CU Shares

Shares Outstanding

ETF shares change continually as the authorized participants create new shares or redeem old ones. Monitoring the number of outstanding shares provides a window on whether demand is increasing or decreasing for the ETF.

Symbology

ETFs have a ticker symbol just as stocks and other tradable assets do, so that they can be designated unambiguously. ETF tickers also have a 2 character extension for the various values of the ETF:

So, for example, the estimated cash per creation unit for the Schwab Fundamental US Broad Market Index ETF (FNDB) can be found under FNDB.EU. However, most providers of market information do not provide the extended ticker information; Bloomberg does, however.

ETF Spreads

The spread between the ETF bid and the ETF offer depends on trading volume, just like most other assets, but there are other factors peculiar to ETFs that can widen the spread for ETFs that have lower trading volume or where the underlying assets are traded less frequently. Factors that affect both the bid and offer include brokerage and other fees, taxes, and a risk premium to compensate the authorized participants for the risk in creating and redeeming ETF shares. The ETF bid price also depends on redemption fees charged by the issuer and the bid on the underlying securities. The ETF offer price depends on the creation fees charged by the issuer and the offer price on the underlying securities.