Exchange traded funds (ETFs) are unique instruments: they’re like mutual funds, in that they hold baskets of stocks, but they’re like stocks, in that they trade all day on an exchange. If you’ve been wondering how they’re valuated, you aren’t alone.

Daisey Maxey for The Wall Street Journal says that an ETF’s price is determined by market supply and demand for its underlying securities, as well as the prices of those securities.  Since ETFs exist on exchanges, bids and offers set an ETF’s price, and the prices change throughout the day.

An ETF may trade above its net asset value (NAV), which is the value of its holdings. This situation is known as “trading at a premium.” ETFs can also trade below their NAV, which is known as “trading at a discount.” Here’s more on trading ETFs.

An ETF is simply at the whims of supply and demand. If a lot of people want to buy a certain ETF, it may trade above the actual value of its holdings. If popularity remains low, it can trade below that value.

For more stories about ETF information, visit our ETF 101 category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.