How ETFs’ Net Asset Values Are Calculated


Hello, everyone. Today, I think the topic we want to address is net asset values (NAVs) and how they're calculated for ETFs. In the past few weeks, we've seen a bunch of exchange-traded funds to be perceived trading at a huge discount to their net asset value. And since the government has stepped in over the weekend and the announcement of their asset purchase program, particularly in the investment grade world and the fixed income space, we're now actually seeing ETFs trading at perceived premiums to their net asset value. So I think it's important to talk a little bit about how net asset values are calculated.

For equity-type ETFs, it's pretty straightforward. There's a consolidated tape where there is actual reporting for the last sale of shares of IBM for example or Apple. And we can see that real time, and it's reported publicly. But with over-the-counter traded fixed income instruments, sometimes things don't trade for sometimes days or weeks. So how evaluated pricing occurs in those instruments is a little bit more of an art form as opposed to a science.

So, we do, as an issuer of ETFs, compensate a third-party agency to evaluate the prices of certain bonds and to help formulate the net asset value. But what's happening over the last few weeks — both on the discount side as well as the premium — is the ETF is actually sharing the real valuations of those actual underlying securities. So will NAVs s catch up to the ETF, or will the ETFs catch up to the NAVs? It's a little bit of a guessing game, but I do believe as liquidity comes into the marketplace, we should see more accurate marks for underlying securities that trade over the counter.

So, again thank you for your time in this unprecedented timeframe. We're here to help, and we'll look to give you more updates as we go on.

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