iNAV. Funny sounding name, right?
Well yes, but it is an important part of understanding what ETFs are all about.
iNAV stands for ‘indicative net asset value’.
What’s the Net Asset Value (NAV) you might ask? Well it’s total net assets under management of a portfolio. The NAV moves up and down according to the securities the portfolio holds and how they are performing.
Just a bit of background to start….
Managed funds have unit prices. Unit prices are the daily net asset value per unit of the fund in which you are invested. But as you can see, managed funds only strike a unit price once a day, sometimes even once a quarter, depending on the fund.
Because ETFs are listed on the stock exchange and act like a share, they need to show investors at any time of the day what its price is.
This is what the iNAV does. An iNAV provides investors an indicative price reflective of the assets in the ETF and the number of shares on offer. The iNAV is calculated and made public every 15 seconds.
WARNING … now it’s going to get a bit technical….
How to calculate an iNAV?
Well, to calculate an iNAV, you have to start with the securities the ETF holds. This is what we call a “basket”. This basket of securities is a representative sample of what you may own if you invest in an ETF. However it’s only a representation – a good one – but still only a representation.
To calculate the iNAV, there is an iNAV provider – a company that specialises in providing iNAVs to everyone in the market (importantly they are independent from the Responsible Entity or ETF provider) – and they price each security in the basket.
iNAV represents the “best indicative” price of a fund, so paying substantially more or receiving substantially less than iNAV, generally, may not the best thing to do.
Once this is done, the iNAV provider sums all the securities in the basket, including any leftover cash – to get the total net asset value of the ETF. This total is then divided by the number of ETF shares available to get a ‘per share’ cost. This can move up and down as markets move up and down, and shares move up and down.
If you’re super geeky or even just a little bit interested in maths, here’s a quick overview of the calculation formula:
The result, iNAV is a great reference point anytime you’re thinking about buying and selling an ETF.
Remember, iNAV represents the “best indicative” price of a fund, so paying substantially more or receiving substantially less than iNAV, generally, may not the best thing to do.
Although an iNAV is necessary for investors to be able to trade throughout the day, the iNAV is not without its issues. Let’s have a look at some of the drawbacks of the iNAV calculation.
iNAV Limitations
You might appreciate if you trade in a fund that owns securities in a different time zone such as the US, Europe or Asia, that the end of their day is different from ours.
You probably know that the market opens at 10am and closes at 4.30pm. iNAVs are provided regularly during that time frame. When the market is closed, iNAVs aren’t provided.
However, if you have an ETF that holds, for example, US equities, the prices of the basket of securities are continuing to move up and down whilst we are asleep Down Under. This means that the last iNAV of the fund holding US securities is ‘old’ when the market opens again in the morning.
This, quite obviously, is a limitation on the accuracy of the iNAV for that ETF. However this changes quickly when the iNAV provider starts to price the fund throughout the day our time. But as you can see, the iNAV can be only a “best indicative” price.
The other limitation of an iNAV is that it is only issued every 15 seconds. These days with technology and particularly in volatile markets when split seconds can count, this “small” delay may misrepresent the actual value of a fund.
Remember, the iNAV only represents the “best indicative” price of an ETF.
This may mean that people/companies can take advantage of that 15 second time delay.
“Best indicative” valuation of the iNAV can also be done by market makers or other providers of liquidity whose business it is to trade in ETFs.
Put simply, market makers and other providers of liquidity also estimate their own version of the “best indicative” price the ETF. They might determine that their valuation of an ETF is higher or lower than what its iNAV is currently trading at on an exchange, and they too might take advantage of this difference.
It is best to look at the iNAV and what the ETF is trading at before making a decision to trade and also speak to your financial adviser or broker. I’m sure they’ll be able to help.
