Explore the Regulatory Environment in which ETFs operate

NET ASSET VALUE

The net asset value of an ETF security is calculated daily and is based on the value of the assets in the portfolio. These assets consist of the shares that make up the index, and cash.

 

Constituent Securities

The portfolio invests in the same securities, in the same proportion, as they are represented in the applicable index. The portfolio is adjusted in line with changes to the index; generally on index re-balance dates and when corporate actions occur on the underlying securities. In this way, the portfolio will track the value of the index at all times. read more

 

Cash

The portfolio receives cash, substantially in 3 forms:

1. the fund will receive dividends or interest from the underlying securities which it holds;
2. the portfolio lends out scrip for which a fee is earned from the borrower; and
3. the fund will receive interest on cash balances in its bank account.

The expenses of running the fund are deducted from this cash balance when determining the net asset value of a security. These fees are generally annual fees but are accrued daily for the sake of NAV calculations.

The basic equation for calculating the NAV of a fund security is therefore:

Value of underlying securities in the portfolio

+	Accrued income for the period
-	Accrued expenses for the period
÷	Number of fund securities in issue
=	NAV per fund security

For this reason, the NAV of a security may be at a premium to the index that it is tracking, because most indices are based on the capital value of the underlying securities only and do not include any income in its calculation.