Premium or discount
The gap between an exchange-traded fund's market price and the net asset value of its holdings, expressed as a percentage of that value.
Example
A fund quoted at 48.95 against a struck value of 50.00 prints a 2.10% discount - which may mean only that the holdings stopped trading nine hours ago.
Important
The published figure is measured at the mid and you transact at the edge, so it understates what a buyer pays. And a gap on a fund whose holdings are closed or thinly traded is often the valuation being stale rather than the price being wrong.
Related terms
- Net asset value — The stated value of a fund's holdings less its liabilities, usually expressed per unit. In illiquid vehicles it is produced by a valuation process rather than by trading.
- Creation and redemption — The wholesale mechanism by which large blocks of exchange-traded fund units are issued in exchange for a basket of the underlying securities, or cancelled in exchange for that basket.
- Arbitrage — Buying and selling two forms of substantially the same thing at the same time to capture a price difference between them.
- Bid-ask spread — The gap between the highest price a buyer will pay and the lowest a seller will accept. A cost paid on every round trip.
Lessons that explain it
All 578 terms in the Investing glossary