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.