How Does An ETF Unit Price Move When The Index Moves?

This guide is part of our Comprehensive Guide To ETFs. We strongly recommend checking out the guide in full to get a better understanding of ETFs.

ETFs generally ‘track’ a benchmark index. This means that when the index moves the price of the ETF will have the same percentage change.

For ETFs that track ASX indices the ASX will calculate what is called an Estimated Intraday Net Asset Value (EIN or iNAV) for an ETF. The EIN gives the value of the fund’s underlying portfolio throughout the day. This means that market participants can always check the fair value of the ETF and buy if the price is too low or sell if the price is too high.

The process of adjustment between fair value and market price is called a process of arbitraging. Market participants are told the fair value of the underlying portfolio that the ETF holds and know that if it is under or overpriced it must adjust to the fair value.

For example, for SPDR S&P/ASX 200 (ticker code STW) you can use the symbol YSTW to see the EIN during trading hours.[1] You can see from the chart below that the EIN moves almost exactly in line with the ETF.

 

ETF STW and NAV Price Graph

ETF STW and NAV Price Graph

Demand and supply

The arbitrage process above means that the percentage change in unit prices for the ETF will always be the same as the percentage change in the index. Price movements can remain independent of demand and supply for the fund.

 

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References

[1] STW Fact Sheet 30th June 2011