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Traders Corner: Net Asset Value: NAV
In this edition of Traders Corner, we'll be taking a look at what is commonly called the Net Asset Value or NAV. While most traders have come across this term, few truly understand what the NAV is and why it is so important to the Mutual Fund and ETF Markets.
The NAV or Net Asset Value is specifically geared towards trading instruments that track a particular list of assets. Some of these include Mutual Funds, ETF’s (Exchange Traded Funds) (i.e. QQQQ, DIA, SPY), Money Markets and many others. The NAV is a particularly useful piece of information because it qualifies the actual value of a fund or ETF by subtracting the liabilities divided by the number of outstanding shares to come up with an actual value per one share the fund. The liabilities of a particular fund are defined by the amount of debt that has been agreed to be settled at some period of time. Here is an example of how the NAV is derived….
Money Market Fund ABC has 100 million dollars in assets; however, their total liabilities are approximately 15 million dollars. This translates to having a NAV of 85 million dollars. While the 100 million dollars in assets is attractive, it’s not an accurate representation of its value. By taking the amount of liabilities into account, we are left with a much more realistic and accurate representation of what this fund is actually worth.
Another way to think about Net Asset Value is this….
Currently Mutual Fund XYZ has a NAV of $85 million dollars. The investors in the fund currently hold 10,000,000 shares among them. This means that the NAV per share is $8.50. This is the actual value per one share of Mutual Fund XZY.
NAV / Total Shares Outstanding = NAV per Share
Because it can be a daunting task to calculate total assets and total liabilities in real time for all the components of mutual fund, the NAV is typically updated only once per day.
Keywords & Financial Terminology
NAV: Net Asset Value
Liabilities: A liability is a financial obligation, debt, claim, or potential loss
ETF: Exchange Traded Fund: A fund that tracks an index, but can be traded like a stock.
Mutual Fund: An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets
Money Market: Money market securities are generally very safe investments which return a relatively low interest rate that is most appropriate for temporary cash storage or short-term time horizons.
Debt: An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment terms.
In this edition of Traders Corner, we'll be taking a look at what is commonly called the Net Asset Value or NAV. While most traders have come across this term, few truly understand what the NAV is and why it is so important to the Mutual Fund and ETF Markets.
The NAV or Net Asset Value is specifically geared towards trading instruments that track a particular list of assets. Some of these include Mutual Funds, ETF’s (Exchange Traded Funds) (i.e. QQQQ, DIA, SPY), Money Markets and many others. The NAV is a particularly useful piece of information because it qualifies the actual value of a fund or ETF by subtracting the liabilities divided by the number of outstanding shares to come up with an actual value per one share the fund. The liabilities of a particular fund are defined by the amount of debt that has been agreed to be settled at some period of time. Here is an example of how the NAV is derived….
Money Market Fund ABC has 100 million dollars in assets; however, their total liabilities are approximately 15 million dollars. This translates to having a NAV of 85 million dollars. While the 100 million dollars in assets is attractive, it’s not an accurate representation of its value. By taking the amount of liabilities into account, we are left with a much more realistic and accurate representation of what this fund is actually worth.
Another way to think about Net Asset Value is this….
Currently Mutual Fund XYZ has a NAV of $85 million dollars. The investors in the fund currently hold 10,000,000 shares among them. This means that the NAV per share is $8.50. This is the actual value per one share of Mutual Fund XZY.
NAV / Total Shares Outstanding = NAV per Share
Because it can be a daunting task to calculate total assets and total liabilities in real time for all the components of mutual fund, the NAV is typically updated only once per day.
Keywords & Financial Terminology
NAV: Net Asset Value
Liabilities: A liability is a financial obligation, debt, claim, or potential loss
ETF: Exchange Traded Fund: A fund that tracks an index, but can be traded like a stock.
Mutual Fund: An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets
Money Market: Money market securities are generally very safe investments which return a relatively low interest rate that is most appropriate for temporary cash storage or short-term time horizons.
Debt: An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment terms.