CONTRIBUTORS
David Mann
Head of Capital Markets, Global Exchange-Traded Funds (ETFs), Franklin Templeton Investments
There are many reasons why investors may question the value of valuation data that exchange-traded funds (ETFs) are required to publish—called intraday net asset value (iNAV). In this edition of Capital Markets Corner, David Mann, our head of Capital Markets, Global ETFs, explains what iNAV means, and why some observers misunderstand its usefulness.
As the name implies, exchange-traded funds (ETFs) are funds that trade on an exchange. Sounds pretty straightforward, right? Like mutual funds, they can offer potential diversification benefits and exposure to a specific asset class.1 And like stocks, they allow for intraday trading on an exchange.
All ETFs are required to publish the value of their underlying securities basket(s) throughout the trading session. This is called the intraday net asset value (iNAV) and also at times called the IOPV (intraday optimized portfolio value). Note that iNAV doesn’t represent the actual price an investor pays to purchase an ETF, (which can be higher or lower). Rather, it is used as a reference for the underlying securities’ value.
While widely used, most of the ETF industry treats the iNAV as a flawed metric. Here is a quick summary of the criticisms some market observers have voiced:
- iNAV falls short for US ETFs with underlying international equity securities because it does not contemplate the price discovery of how those stocks closed for trading in the United States will perform when they open the next trading day.
- iNAV isn’t a good indicator for US ETFs with underlying fixed-income securities because the bonds are often illiquid and price on the bid (buy) side.
- iNAV is an imperfect fit even for US ETFs with underlying US equity securities because it is only updated every 15 seconds.
- iNAV can cause intraday premiums/discounts that are confusing.
I do, however, feel that iNAV is getting unjustly blamed for lacking something it is not equipped to provide. The point of iNAV is NOT to explain the real-time price of an ETF, rather the point of iNAV is to explain the real-time price of an ETF’s underlying basket of securities. Those are two very different objectives. If an investor is using iNAV as a way to see if the real-time price of the ETF is “fair,” in my humble opinion, he or she is going to be disappointed.
I strongly believe any discussion on the price of an ETF starts with the value of its underlying basket of securities. If you want to get into price discovery and why markets in Hong Kong or Japan or Taiwan for example are expected to be up 3% tomorrow, you need to start with the last price of the underlying basket. Any intraday premiums/discounts between the ETF price and the iNAV price are simply a product of this price-discovery process in action. From there, we can debate whether we think the US ETF market is accurately predicting what will happen in those markets the next day.
In my view, having a real-time price of the underlying basket that everyone can agree on has real value when thinking through why an ETF trades at a certain price. That is why I am against the practice of iNAVs having a “fair-value” adjustment. A fair-value iNAV may lower the intraday premiums and discounts, which might be optically beneficial, but in my opinion, this is at the cost of no longer being able to see what the real-time price of the basket is worth.
David Mann’s comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
This information is intended for US residents only.
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1. Diversification does not guarantee profits nor protect against the risk of loss.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.