What does net asset value (NAV) mean?

Find out why net asset value (NAV) is an essential metric for investors in ETFs and managed funds to understand.

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What is net asset value (NAV)?

Net asset value, or NAV, is a financial metric that measures the value of an investment fund's assets minus its liabilities, divided by the number of outstanding shares. Analysts and investors use it to determine the per-share value of managed funds and exchange-traded funds (ETFs)

Before buying or selling shares, you should have a sense of the market value of each one. The same goes for shares of managed funds and ETFs, their market value represented by the NAV. Fund managers are required to disclose NAV regularly. 

How do you calculate it?

The calculation of the NAV involves adding up the value of all the securities and other assets held by the relevant fund, including cash and cash equivalents, subtracting any liabilities, and dividing the result by the total number of outstanding shares. The resulting number represents the per-share value of the fund.

For example, if a managed fund has total assets of $1 million and liabilities of $100,000, and there are 100,000 outstanding shares, the NAV of the fund would be:

($1,000,000 – $100,000) / 100,000 shares = $9 per share

An investment fund's NAV is typically calculated at the end of each trading day and used by investors to determine the value of their holdings in the fund. It's important to note that the NAV of a fund may not necessarily reflect the actual market value of its holdings, especially in cases where the fund holds illiquid or hard-to-value assets.

What does the net asset value indicate?

Investors often use NAV as an indicator of a fund's overall performance and liquidity. A high NAV typically indicates that the fund has performed well, while a low NAV may suggest the fund has experienced losses. 

But the NAV is just one metric among many that you should consider when evaluating an investment, and it should not be the sole factor in making investment decisions.

The NAV can fluctuate over time based on changes in the value of the underlying assets held by the fund and changes in the number of outstanding shares. Additionally, NAV may not always accurately indicate the actual value of an investment. This is especially in cases where the fund's assets may be complex to value or other factors may affect the fund's overall performance.

Is a higher or lower NAV better?

For managed funds and ETFs, a higher NAV typically indicates that the fund's performance has been positive and that the value of the underlying assets has increased. This can be a positive sign for investors, as it suggests that their investment has appreciated in value. 

However, a higher NAV doesn't necessarily mean that the fund will continue to perform well in the future. Past performance is not a guarantee of future results. Investors should evaluate the NAV in the context of other factors, such as the fund's investment objectives, performance history, fees, and other relevant metrics.

Shares in ETFs can trade at a discount or premium to the NAV, especially in times of volatility. If the fund is in high demand, but supply is low, its market price might exceed its NAV. On the other hand, if there is plenty of supply and little need for the fund, the NAV may be higher than the market price.  

What is the difference between NAV and shareholder equity?

Net asset value and shareholder equity are both financial metrics that evaluate the worth of an investment, but they are calculated differently and represent different aspects of an investment.

The NAV is commonly used to determine the value of managed funds, ETFs, and other similar investment vehicles. It measures the fund's overall value and reflects the market value of the underlying assets in the portfolio.

On the other hand, we use shareholder equity to evaluate the worth of a company's stock. It represents the difference between the company's total assets and total liabilities. 

In other words, it reflects the value left over if all of the company's liabilities were paid off using its assets. Shareholder equity measures the company's net worth and represents the value shareholders would theoretically receive if the company were to be liquidated.

While both NAV and shareholder equity are value measures, they are calculated differently and represent different aspects of an investment. NAV represents the value of a portfolio of assets, while shareholder equity represents the value of a company's stock.

What does NAV tell you about an ETF?

The NAV is an important metric to consider when evaluating an exchange-traded fund. 

Here are a few things the NAV can tell you about an ETF:

  • The market value of the ETF: The net asset value of an ETF represents the market value of the underlying assets held by the fund, less any liabilities. This can give investors a sense of the overall value of the ETF and can be used to compare the value of the ETF to its share price.
  • The performance of the ETF: Over time, the NAV of an ETF can fluctuate based on changes in the value of the underlying assets held by the fund. A rising NAV can be a positive sign that the ETF has performed well, while a falling NAV can indicate that the ETF has experienced losses.
  • Premiums or discounts to NAV: Because ETFs trade on an exchange like a stock, their market prices can be different from their NAVs. If the market price of an ETF is higher than its NAV, the ETF is said to be trading at a premium. If the market price is lower than the NAV, the ETF is trading at a discount. Premiums and discounts can be significant to consider, as they can impact the potential returns for investors.

While the NAV is just one metric to consider when evaluating an ETF, it can provide important information about the fund's overall value and performance over time. Investors can also compare the performance of different funds over time by tracking the relative changes in their NAVs. 

This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a 'top share' is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a 'top share' by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.

The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.