The net asset value is calculated by taking the total value of all assets that make up the mutual fund or exchange traded fund, deducting the total value of all liabilities, and then dividing by the total number of shares outstanding.
Net Asset Value Example
Imagine that there is an exchange traded fund that buys and sells gold and silver on leverage. At a certain time the fund owns $100 million worth of gold and $50 million worth of silver at spot prices, is borrowing $100 million and has 50 shares outstanding.
The net asset value of the shares of this fund at this point in time would be ($100 million + $50 million – $100 million)/50, or $1 million per share.
The Importance of Net Asset Value
NAV is a very important measure when deciding to invest in an ETF or mutual fund because the NAV and the actual share price on the market can differ, often by a significant amount.
A current NAV that is above the share price, for example, may be a good buy signal, as the fund may be seen as under-priced.
Alternatively, a NAV that is higher than the share price may signal concerns about the fund’s management or long term strategy, which is why the shares are currently trading at a discount.
Net asset value, or NAV, is a very simple yet highly informative measure that provides significant insight into the relative attractiveness of a fund’s current market price per share.
A divergence between a fund’s current net asset value and its market price per share is often a useful way to identify potentially profitable trades, as it signals that the market is placing a discount or premium on the actual structure or management of the fund, as opposed to simply valuing the fund strictly according to its assets less its liabilities.