ETF Market Price vs. ETF Net Asset Value in India: An Overview

Unlike mutual funds, which may price their shares weekly, quarterly, or annually, exchange-traded funds (ETFs) in India are priced daily. The pricing of ETFs

is influenced by the difference between the market price and the net asset value (NAV).

Key Takeaways

• ETF Market Price: The price at which ETF shares are bought or sold on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) during trading hours.
• ETF Net Asset Value (NAV): The value of each share’s portion of the fund’s underlying assets and cash, calculated at the end of the trading day.
• Calculation of NAV
  
  : It is determined by adding the value of all fund assets, subtracting liabilities, and dividing by the number of outstanding shares.
• Market Price vs. NAV Differences: These values may differ slightly due to intra-day supply and demand fluctuations.

What Is ETF Market Price?

The ETF market price represents the value at which ETF shares are actively traded on Indian stock exchanges (NSE & BSE). Since ETFs

trade like stocks, their prices fluctuate throughout the trading day based on supply and demand dynamics.

• If buyer demand exceeds supply, the price tends to rise.
• If seller supply outweighs demand, the price tends to fall.

What Is ETF Net Asset Value (NAV)?

The ETF net asset value (NAV) is the valuation of the fund’s total assets, calculated at 3:30 PM IST, when the Indian markets close. The NAV

is a crucial metric for comparing the performance of funds and reporting accounting figures.

Formula for NAV Calculation:

Key Features of NAV:

• Used for fund performance comparison.
• ETFs disclose daily holdings, including cash, outstanding shares, and accrued dividends.
• More transparency compared to mutual funds, which disclose holdings quarterly.

Key Differences Between ETF Market Price and NAV

Though ETF market price and NAV remain close due to a built-in redemption mechanism, there may be slight variations. These discrepancies occur due to market demand fluctuations and international trading hours.

How the ETF Redemption Mechanism Works in India

To maintain alignment between market price and NAV, ETFs use authorized participants (APs). These entities form creation units, which consist of underlying assets that match the ETF’s index.

1. The AP assembles a basket of stocks matching the ETF’s underlying index.
2. The AP exchanges this creation unit for ETF shares with the ETF provider.
3. The AP sells the ETF shares in the open market, ensuring price stability.

A typical creation unit consists of 50,000 ETF shares, keeping the market price and NAV aligned.

Impact of International Markets on ETF Pricing in India

The ETF market price and NAV can diverge due to differences in global market hours. If an Indian ETF contains stocks from multiple countries, some underlying assets may not be actively traded when the ETF is priced.

How Arbitrage Maintains Price Stability

APs engage in arbitrage to capitalize on ETF price discrepancies:

• If market price exceeds NAV, APs sell ETF shares and buy the underlying assets.
• If market price drops below NAV, APs buy ETF shares and sell the underlying assets.

This process helps maintain market efficiency, ensuring ETF pricing remains close to NAV.

Frequently Asked Questions (FAQs)

Why Can an ETF’s Market Price Differ from the NAV?

ETF market price deviations occur due to shifts in supply and demand. High demand with limited supply pushes the market price above NAV, while low demand with excess supply causes the price to fall below NAV.

How Is the NAV of an ETF Calculated?