Definition
Premium/Discount to NAV
An ETF trades at a premium when its market price is above its net asset value and at a discount when below, reflecting temporary imbalances between on-screen supply and demand and fair value.
In well-functioning Indian ETFs, the creation/redemption arbitrage by authorised participants keeps the price within a narrow band of iNAV. Persistent or large premiums and discounts signal a problem, such as thin AP activity, illiquid underlyings, or restrictions, as seen at times in some international and certain bond ETFs.
Investors should always compare an ETF's screen price to its live iNAV before trading, since buying at a wide premium effectively overpays for the basket. A history of tight, stable price-to-NAV alignment is a strong indicator of a healthy, liquid ETF with active market makers.
Related terms
- ETF Creation/RedemptionCreation and redemption is the primary-market mechanism by which authorised participants exchange a basket of underlying securities (or cash) for new ETF units, or hand back units for the basket, keeping the ETF price aligned with its NAV.
- Authorised ParticipantAn authorised participant is a large institutional intermediary contracted with an ETF issuer that has the exclusive right to create and redeem ETF units directly with the fund in large blocks.
- iNAV (Indicative Net Asset Value)iNAV is a near-real-time estimate of an ETF's per-unit net asset value, recalculated frequently through the trading day from the live prices of the underlying holdings.
- International ETFAn international ETF gives Indian investors exposure to overseas markets or indices, such as the Nasdaq 100 or S&P 500, by holding foreign securities or feeding into an overseas fund.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.