how etf price is calculated

How ETF Price is Calculated

Exchange-traded funds (ETFs) are baskets of securities that trade on exchanges, similar to stocks. Their prices, however, are calculated differently from individual stocks.

Step 1: Calculate the Net Asset Value (NAV)

1. The fund manager determines the total value of all the assets held in the ETF's portfolio.
2. This value is divided by the total number of ETF shares outstanding, resulting in the NAV.

Step 2: Factor in Market Demand and Supply

1. Investors buy and sell ETF shares on the exchange.
2. As buyers outnumber sellers, the demand for the ETF increases, driving the price up. Conversely, if sellers outweigh buyers, the price decreases.

Step 3: Adjust for Premium/Discount

1. The ETF's market price can deviate from its NAV due to market factors.
2. If the ETF trades above its NAV, it is said to be trading at a premium. Conversely, if it trades below its NAV, it is trading at a discount.

Step 4: Spread Factor

1. ETF market makers, who facilitate trades, charge a spread, which is the difference between the bid price (price investors buy at) and the ask price (price investors sell at).
2. This spread is a small commission for market makers' services.

Calculating ETF Price Example

Assume an ETF has the following characteristics:

• Total assets value: $100 million
• Number of shares outstanding: 10 million

1. NAV Calculation: $100 million / 10 million shares = $10 per share
2. Market Demand: High demand drives the price up to $10.20 per share
3. Premium Calculation: $10.20 - $10 = $0.20 premium over NAV
4. Spread Calculation: Market maker charges a $0.05 spread

• Bid price: $10.15 per share
• Ask price: $10.20 per share

Therefore, the ETF's price on the exchange is $10.20 per share, factoring in market demand and supply, as well as the premium and spread.