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 (NAV), which is calculated by dividing the total value of all the securities in the portfolio by the number of outstanding shares.
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: