Premium or discount to NAV
What is Premium or discount to NAV?
Premium or discount to NAV is the percentage difference between a fund share's market price and its net asset value per share at a comparable time. It measures the relationship between secondary-market valuation and underlying accounting value, not a guaranteed arbitrage profit or an independent assessment of whether the portfolio itself is attractively valued.
How it is calculated
Subtract NAV per share from market price and divide by NAV. A positive result is a premium and a negative result is a discount. The calculation is meaningful only when price and NAV are aligned in time and currency. End-of-day comparisons can be noisy when foreign holdings stopped trading hours before the ETF's local exchange closed.
Why differences arise
Supply and demand, underlying-market closure, stale NAV inputs, trading costs, taxes, creation restrictions, liquidity, sentiment, leverage, and distribution policy can move price from NAV. ETF arbitrage often limits differences in normal markets. Closed-end funds lack ordinary daily redemption and can maintain wider discounts or premiums based on governance, performance, payout, and investor demand.
Example
A fund's NAV is $25 and its market price is $24, producing a 4% discount. If an investor buys and both NAV and price later become $25, discount narrowing adds about 4.17% based on the $24 purchase. If NAV falls while the discount widens, losses combine. A discount alone does not establish a bargain.
How to interpret it
Compare the current observation with the vehicle's structure, history, peers, underlying market hours, spread, and indicative values. Determine whether NAV itself is reliable. An apparent international ETF discount can reflect more timely price discovery in the ETF rather than mispricing. For closed-end funds, analyze leverage, distributions, fees, liquidity, governance, and plausible catalysts before expecting convergence.
Risks and practical checklist
Premium buyers can lose when it collapses, while a discount can widen or persist indefinitely. Stale or modeled NAV can create false precision. Use synchronized timestamps, official data, and total return. Check bid and ask rather than last trade, exclude ex-distribution mechanical effects, and stress market closure. Never promise that arbitrage or a term date will deliver NAV without reviewing legal and operational conditions.
Sources and further reading
- Investor Bulletin: Exchange-Traded Funds, U.S. Securities and Exchange Commission
- Net Asset Value, Investor.gov, U.S. Securities and Exchange Commission