Before investing in ETFs
Navigating the intricacies of ETF-investing
Exchange-traded funds (ETFs) have become a pivotal instrument for passive investing, providing investors with a wide spectrum of investment avenues across diverse asset-classes, sectors and strategies. With over 206 listed ETFs spanning equity, debt and commodities like gold and silver, collectively managing assets worth ₹7.15lakh crore as of April 2024, investors have access to a dynamic toolkit for constructing portfolios tailored to their risk appetites and financial objectives. However, navigating the intricacies of ETF-investing involves understanding the disparity between an ETF’s market price and its Net Asset Value (NAV), and understanding key performance metrics crucial for eective selection. Mastering these concepts is essential for investors to wield ETFs eectively, enabling them to make informed decisions and optimise their investment strategies.
MARKET PRICE VS NAV
The NAV of an ETF represents the per-share value of the fund’s underlying assets after deducting its liabilities and is calculated at the end of each trading day. On the other hand, the market price of an ETF fluctuates throughout the trading day based on supply and demand dynamics. When demand for an ETF rises, its market price may surpass its NAV, leading to a premium. Conversely, if demand declines, the market price might drop below NAV, resulting in a discount. Timing dierences, particularly evident in international ETFs, can also contribute to premiums/discounts. This occurs when there’s a gap between the ETF’s