If an ETF is traded less frequently, the price of an ETF can get above what its true value is, called a premium. The reverse, when the market price is below the value of the assets the ETF owns, is called a discount. Premiums can also occur when a fund stops issuing new shares, which happened in the case of United States Natural Gas (NYSEArca: UNG) last year. Discounts and premiums to NAV have also been an issue in bond ETFs, thanks to market volatility. [The Cost of High Fees.]
Why should you care about discounts and especially premiums? You want to get the best value – no one wants to pay $100 for something that’s only worth $90.
You can find the discount or premium at which an ETF is trading by looking at the NAV and what it’s currently trading at.
For more stories about ETFs, visit our ETF 101 category.
