The net asset value (NAV) return is the change in the value of a fund’s assets over a period. A mutual or exchange-traded fund’s (ETF) NAV return can differ from total or market returns because funds may trade at a premium or discount to their NAV. Funds trading above their NAV are said to trade at a premium, while funds trading below their NAV do so at a discount.
Key Takeaways
- The net asset value (NAV) return measures an ETF’s or mutual fund’s performance over time by examining the change in the value of its components.
- A NAV return uses the fund’s change in NAV over time rather than the fund’s market value change or total return.
- NAV can differ from a fund’s market price since it is computed at the end of each trading day, while the securities (stocks, bonds, etc.) owned by the fund trade throughout the day.
- Closed-end funds are more likely than others to trade at a premium or discount to the NAV.
Illuminate the Complexities of NAV Return
The NAV return is calculated based on the fund’s NAV reported after the stock market closes each trading day. The NAV is the total assets minus total liabilities divided by the outstanding shares. The value changes daily as assets fluctuate based on market value. The NAV return is a transparent accounting measure that reports the actual holdings in the fund at the end of the day. Therefore, dividends, interest, and capital gains distributed to shareholders are not included in the total assets unless reinvested.
The total return of a mutual fund includes distribution payouts. Therefore, it accounts for distributions to shareholders, whether they are reinvested or not. Distributions are the main reason you might see a variation in NAV and total return.
Investment funds that trade on exchanges in real-time, such as closed-end funds and ETFs, can also be priced at a premium or discount, causing market returns to vary from NAV returns. These funds typically trade close to their NAV, though with slight differences. If a fund differs too much from its NAV, authorized participants may intervene to help correct the price.
Closed-End Funds, NAV Returns, and Examples
Fund managers provide NAV returns and other measures of returns, which investors monitor to track their performance. As we’ve noted, mutual funds and ETFs have price and NAV returns that should closely match. For example, the Vanguard Total Stock Market Index Fund (VTSAX), an open-end mutual fund that tracks the entire U.S. stock market, is designed to trade at precisely the NAV. Changes in investor demand shouldn’t cause too much of a deviation since the fund manager creates or redeems shares to meet it exactly.
Closed-end funds (CEFs) are far more likely to trade at a premium or discount to their NAV. Indeed, the Investment Company Institute’s recent reports on CEFs note that discounts for these funds have been widening in recent years. For example, the Eaton Vance Tax-Managed Buy-Write Income (ETB) fund, as of a recent check, is at a discount to its share price, $13.19, vs. its NAV, $14.49. Recently, its price increased by 7.51%, but its NAV return was 17.64%. Here are the price and NAV returns for a few years to illustrate:
- 2020: Price: 5.2%, NAV: 8.9%
- 2021: Price: 6.9%, NAV: 10.3%
- 2022: Price: -3.1%, NAV: -0.5%
- 2023 (YTD until April 25): Price: 7.51%, NAV: 17.64%
Consider the Guggenheim Strategic Opportunities Fund (GOF), which was recently trading at a 20.93% premium. This represents a market price of $14.33 against a NAV of $11.85. The significant premium suggests that investors are highly optimistic about the expected returns of the fund’s assets. Here’s a snapshot of GOF’s returns for context:
- 2020: Price: 9.2%, NAV: 9.1%
- 2021: Price: 12.4%, NAV: 11.0%
- 2022: Price: -5.0%, NAV: -4.7%
- 2023 (YTD until April 25): Price: 14.8%, NAV: 11.85%
Delve into Why a NAV Might Differ from Market Price
There are several reasons why a fund might trade at a premium or discount to its NAV:
- Supply and Demand: The supply of and demand for the fund’s shares affects its market price. Significant demand or limited supply may push prices above NAV.
- Market Sentiment: Investor optimism or pessimism about future returns influences whether a fund trades at a premium or discount.
- Distribution Patterns: Established distribution histories, such as a record of regular payments, can influence pricing relative to NAV.
Regular Mutual Funds vs Trading Above or Below NAV
Traditional mutual funds operate differently as they always trade at NAV because shares are bought and sold directly from/to the fund provider. Thus, there is no bid/ask spread or opportunity to trade above or below NAV.
Strategic Insights on Buying Funds Trading Above NAV
Investing in a fund trading above its NAV may signal high investor confidence in the portfolio. Nevertheless, it’s vital to consider your own investment goals and the associated market risks. While premium trading might reflect optimism about the fund’s potential, it’s essential to weigh such investments within the context of your broader financial strategy.
Wrap-Up: Mastering the NAV Return Concept
NAV return is the change in the value of a fund’s net assets, providing essential insights into fund performance beyond share price movements. While ETFs often maintain close alignment between NAV and market price, closed-end funds might exhibit broader disparities.
Understanding factors influencing NAV and price discrepancies is key to making informed investment decisions. Use NAV returns in tandem with other return metrics to evaluate your investment options thoroughly.
Related Terms: total return, market price, investment funds, asset management.
References
- S.K. Parameswaran. “Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange,and Derivatives”, Pages 433–436. John Wiley & Sons, 2022.
- S.K. Parameswaran. “Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange,and Derivatives”, Pages 455–458. John Wiley & Sons, 2022.
- Investment Company Institute. “US Closed-End Funds (2023)”, p. 69.
- CEF Connect. “ETB”.
- Investment Company Institute. “A Guide to Closed-End Funds”.
- Ed Moisson. “The Economics of Fund Management”, Pages 141–153. Agenda Press, 2024.
- Financial Industry Regulatory Authority. “Opening Up About Closed-End Funds”.
- Charles Schwab. “Mutual Funds vs. ETFs”.
