Understanding ETFs

Exchange-traded funds (ETFs) are investment funds that trade on a stock exchange. They are popular due to their low costs and tax efficiencies.

Here’s a glossary of ETF terms that will help you better understand these funds.

Underlying securities: Certain types of securities issued by corporations.

Net asset value (NAV): In mutual funds, the market value of a fund share; synonymous with bid price. NAV is calculated after the close of exchanges each day by taking the closing market value of all securities owned, plus all other assets like cash, subtracting all liabilities, and then dividing the result by the number of outstanding shares — this last number can vary, depending on purchases and redemptions. This definition is specific to mutual funds.

Market price: Last reported price at which a fund was sold. For any inactively traded security, evaluators have to determine a market price if needed. For ETFs, market makers look at the last prices and the depth of all securities in the basket of the fund to calculate its price.

Intraday value: Stocks reach various high and low prices throughout the trading day. An ETF’s intraday value is its estimated fair value based on the most recent highest and lowest same-day price of its underlying assets. It is used to gauge the fund’s current market price against an intraday NAV estimate.

Bid-offer spread: The difference between a fund’s bid and offer prices. The two prices together comprise a quotation. For instance, if an ETF is trading at $15.30, market makers will set the spread at $15.29 to $15.31 to show its highest bid and lowest offer. This is also know as the bid-ask spread.

Sources: Barron’s Dictionary of Finance and Investment Terms, Fifth edition; ProShares.com.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.