How Is The Price Of An ETF Unit Determined?

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.

Prices for securities traded in a secondary market are always determined by market participants. The ETF itself does not control the price of the units that trade on the exchange.

Ok that’s all well and good, but how do markets actually come up with that price? Well, the price of ETF units actually function in a very different way to the price of shares. Share prices are determined by demand and supply for the shares. The price of a unit in an ETF is independent of the demand and supply for units in the fund. Check out our How Does An ETF Price Adjust With The Index? guide for a full explanation of the adjustment mechanism.

Market participants are informed of the value of the underlying portfolio the ETF holds. The total value of the portfolio divided by the number of issues units is called the Net Asset Value (NAV) of the fund. It is the true value of a unit in the fund.

NAV = total value of assets in ETF* / Number of issued units. [1]

*adjusted for fees and expenses

The market price will always be very close to the NAV of the fund.

 

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References

[1] What are ETFs, ASX, 2011