Brokerage costs

As ETFs are bought and sold like shares, buyers and sellers will pay brokerage commissions when trading.

Fund costs

At iShares we believe in openness when it comes to discussing costs. This is why we publish the Management Costs for all of our funds online. That provides a good indication of how much the funds will be paying for fund management, trustees, licensing and operational costs.

However, we also feel it important that investors know about the implicit costs of ETF ownership, looking at areas such as trading costs and rebalancing costs.

When it comes to trading costs, there are two main considerations: the bid/offer spread (effectively the difference in the buy and sell price of the fund on the stock exchange) and brokerage commissions. ETF spreads tend to be lower for bigger funds (those with more assets under management) and funds that have high daily trading volumes.

Another consideration is rebalancing costs. From time to time, securities can be added or removed from the index and funds tracking these indices will need to be adjusted accordingly. This will incur a cost element to the fund.

ETF pricing and valuations

First introduced in the 1990s to track the returns of stocks markets such as the U.S. (e.g. the S&P 500 Index), Exchange Traded Funds (ETFs) have since grown to a global industry of US$2.67 trillion covering all major regions and asset classes. Today ETFs offer investors exposure to a huge range of indices for shares and bonds as well as for other assets.

ETFs are bought and sold during market hours during which the market price of the ETF is determined by the value of the fund’s holdings as well as supply and demand in the market place for the ETF. While the share price is largely determined by the underlying value of the portfolio (known as the Net Asset Value or NAV), there may be some differences from time to time especially during times of market volatility.

The market price is different to an ETFs NAV which shows the official value of the ETF once a day, based on the closing prices of the underlying securities. The NAV is used to measure ETF performance.

Below are answers to some common questions about an ETFs market price and its NAV.

What is the Net Asset Value (NAV) of an ETF?

The NAV of an ETF represents the value of all the securities held by the ETF (such as shares or bonds and cash) minus any liabilities (such as management fees) divided by the number of shares outstanding.

NAV is most often expressed as the value per share. An ETFs official NAV is calculated once a day, based on the most recent closing prices of the underlying securities, even though the prices of these underlying securities may be hours apart if they trade in other time zones.

For example, some of an ETFs holdings may be traded on exchanges in other time zones, for example in the US or Asia.

What is the market price of an ETF?

An ETFs market price is the price at which investors can buy or sell an ETF on an exchange. This price may deviate from the NAV of the ETF depending on demand for and supply for the ETF at a point in time. The price is usually expressed as a Bid price (the price a buyer is willing to pay for a security) and an Ask/Offer price (the price that a seller is willing to accept for a security).

What is an ETFs NAV used for?

The NAV of the ETF is based on the underlying securities’ closing prices. Hence, when estimating ETF performance versus the index it is tracking, ETF NAV and index closing price should be used.

If an ETFs price reflects the market price of the underlying assets, why can it differ from NAV?

An ETFs price reflects the value of the underlying ETF securities during the day (or what investors expect those values to be if the underlying markets are closed). For example, an Irish-domiciled ETF with exposure to Japanese stocks is traded on the London Stock Exchange, because this exchange is open, however, the ETF includes shares which are listed and traded on an overseas stock exchange, and that market is closed at that time. In addition to that it is also affected by the demand and supply for the ETF in the market place. This can lead to ETF price deviation from the ETF NAV.

What is an ETFs premium or discount?

An ETF is said to trade at a premium when its price exceeds its NAV. An ETF is said to trade at a discount when its price is below its NAV. Premiums and discounts are usually negligible for the majority of ETFs but they can be large during volatile times.

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