In a mutual fund or exchange-traded fund (ETF), the sum of all of the fund’s holdings and cash, minus any debts, is known as the fund’s assets. Fund holdings most commonly include stocks, bonds, and shares of other funds. Some more speculative funds – usually ETFs – can hold derivatives such as options contracts. Some ETFs, such as ‘inverse’ ETFs, hold short positions in securities. Short positions are considered liabilities.
Net Asset Value
Fund shares have a net asset value (NAV) that is calculated by the fund sponsor at least once daily. The NAV is calculated by taking the market value of all of the fund’s assets and dividing it by the number of shares the fund has outstanding.
Example: XYZ Equity Fund owns stock shares that are worth $1 billion, and the fund has 700,000 existing shares. Dividing $1 billion by 700,000 would result in a NAV of $1,428.
The NAV calculation is relevant to shares held in retirement planning accounts such as IRAs, as well as shares in taxable brokerage accounts.
The purchase price of a mutual fund share is known as the public offering price (POP). The POP is calculated by taking the NAV and adding any applicable sales charge.
Mutual fund sales charges – sometimes called ‘loads’ – can be either front-end or back end. A front-end load is paid at the time the shares are purchased. It is expressed as a percentage of the amount invested. Back-end loads are paid at the time shares are redeemed. It is expressed as a percentage of the amount redeemed.
Mutual funds are very common vehicles for retirement planning. NAV is very relevant for mutual fund investors because it represents the market value of their mutual fund shares. If a mutual fund investor wants to sell their shares, they will simply redeem them with the company that issued the shares. The mutual fund company will redeem the shares at the NAV. If the order is placed after market close, the investor will receive the next day’s NAV.
Although ETFs have a NAV that is calculated at least once daily, the NAV does not necessarily represent the market value of an ETF share. ETF shares are not redeemed by the company that issues them; typically, there is an initial public offering of ETF shares, and then the shares are traded on exchanges – much in the way stocks are traded. The market price of existing ETF shares is subject only to investor demand.
While the fund assets of an ETF are calculated once daily, the share price of an ETF fluctuates throughout the trading day. As a result, ETF orders are executed at the most recent price – regardless of fund assets. This usually means ETF prices are more volatile than those of mutual funds.
In short, an ETF’s fund assets only represent the market value of the individual securities in the fund. Shares of the fund itself may trade at a discount or a premium to their NAV.