Does the price of an ETF matter?
THE STACK #37Everyone loves a good deal. When it comes to choosing between two exchange-traded funds (ETFs), it's natural to opt for the one with a lower market value, as that would mean more shares. However, is a cheaper ETF always a favourable choice? In this newsletter, we'll talk about the various factors that influence the price of an ETF.
THE STACK
What is the Net Asset Value (NAV)?
The net asset value (NAV) is the value of a fund's assets minus the value of its liabilities.
It is calculated by dividing the total value of the fund's holdings by the number of outstanding shares.
The NAV per share represents the price at which investors can buy or sell shares in the fund.
It is important to note that the NAV is calculated at the end of each trading day, and it can fluctuate based on the performance of the assets held by the fund.
Factors that affect the NAV
There are several factors that can affect the NAV of a fund. Some of the main factors are:
Fund Holdings
The NAV is determined by the total value of the fund’s holdings. The more securities in a fund, the higher the total value.
When comparing two ETFs that track the same index, one ETF could have a higher number of companies in the fund, which could lead to a higher value of the ETF and a higher NAV.
Outstanding Shares
Outstanding shares refer to the total number of shares of a company's stock that are currently owned by all its shareholders, including institutional investors, insiders, and the general public. These shares are held by investors and are not repurchased by the company.
When evaluating a security, a high number of outstanding shares is usually a positive sign, as this shows that many investors are interested in the security. It also means that there will be enough supply for those who want to purchase that security and enough demand for those willing to sell.
The NAV is calculated by dividing the total value of the fund by the number of outstanding shares. Since the number of outstanding shares is the denominator in this calculation, the NAV will decrease as the number of outstanding shares increases.
So, an ETF with a higher number of outstanding shares, which is a positive trait, could have a lower NAV.
Let’s compare three ETFs that track the total Canadian market
VCN has a higher NAV due to a lower number of outstanding shares, and its net assets are lower because it has fewer holdings.
ZCN has the lowest NAV, making it the cheapest. Its holdings, net assets, and number of outstanding shares are lower than those of XIC, which is why the NAV is lower.
Even though VCN is the most expensive ETF of the three, some investors might consider VCN to be the favourable choice because it has fewer holdings, which could lead to higher performance.
Some investors might also prefer XIC because it has the highest asset value and number of outstanding shares, making it the least risky choice.
Market performance
The performance of the securities held by the fund can directly impact the NAV.
When the fund's securities perform better, their value will also increase, which could lead to an increase in the NAV.
Expenses:
ETFs have various expenses, such as management fees, administrative expenses, and other costs, which can reduce the fund's NAV.
Dividends and distributions
If an ETF pays out dividends or distributions to its investors, the NAV will decrease by the payout amount.
Fund inflows/outflows
If there are more investors buying shares of the fund, the NAV will increase. Conversely, if more investors are selling their shares, the NAV will decrease.
Factors that drive the Market Price
The market price of an ETF is the price at which it is currently trading on the stock exchange.
The market price of an ETF is determined by supply and demand and can fluctuate throughout the trading day.
The market price may be higher or lower than the NAV.
When the market price is higher than the NAV, the ETF is trading at a premium.
When the market price is lower than the NAV, the EYF is trading at a discount.
Some of the key factors that affect the price of an ETF are as follows:
Supply and demand
The market price of an ETF is determined by the balance between the number of buyers and sellers in the market. If there are more buyers than sellers, the demand for the ETF will increase, and the market price will rise. On the other hand, if there are more sellers than buyers, the supply of the ETF will increase, and the market price will decrease.
Some investors may view a low market price for an ETF as a warning sign, which could suggest a lack of demand for the ETF.
Investor sentiment
Investor sentiment refers to how investors perceive the ETF and its underlying assets. If investors are optimistic about the ETF's prospects, they are more likely to buy it, which can drive up the market price. Conversely, if investors are pessimistic about the ETF's prospects, they are more likely to sell it, which can drive down the market price.
Market conditions
Market conditions, such as economic indicators, geopolitical events, and interest rates, can also affect the market price of an ETF. For example, if there is a recession, investors may be more likely to sell their ETFs, which can lead to a decrease in the market price.
Trading volume
Trading volume refers to the number of shares of the ETF that are bought and sold on the stock exchange. High trading volume can indicate strong demand for the ETF, which can lead to an increase in the market price. On the other hand, low trading volume can indicate weak demand for the ETF, which can lead to a decrease in the market price.
Based on these factors, the market price of an ETF may not always reflect its true value. So, do not choose an ETF solely based on its market price. It is essential to evaluate an ETF's underlying assets and long-term prospects before investing.
THE TOOL
This week’s recommendation is my March read - The Mountain is You by Brianna Wiest.
This book discusses how we tend to self-sabotage key areas of our lives due to conflicting desires. I never thought I was one to self-sabotage, but this book has opened my eyes to areas of my life where I have been playing small because I was afraid of the work required to get to where I needed to be.
Some of the prominent symptoms of self-sabotage that she highlighted are as follows:
You’re more aware of what you don’t want than what you do. You spend more of your time focusing, worrying and ruminating on what you hope doesn’t happen than you do imagining, strategizing or planning for what you do
You spend more time trying to impress people who don’t like you than you spend with people who love you for who you are
You are more focused on growing into the type of person who evokes the envy of your supposed enemies rather than the kind of person who is beloved by their family and friends and prioritizes them no matter what…chileeeee, drag me
Your head is in the sand. You don’t know basic facts about your life like how much debt you have, what other people in your field are being paid for similar work 👀
You care more about convincing other people you’re okay than being okay 😫 Your main priority is being liked, even if that comes at the expense of being happy. Sis was coming for my throat here.
You run away whenever you get into an argument…it was at this point I lost my edges
You set goals without understanding why you want to achieve them. If you are doing everything you’re supposed to be doing and yet you feel empty and depressed, the issue is porbably that you’re not doing what you want to be doing, you’ve just adopted someone ele’s script for happiness.
THE ACCOUNTABILITY
March is fraud prevention month and also my annual reminder for you to update your passwords and set up multi-factor authentication on any accounts you perform monetary transactions.
THE COURAGE
THE KNOWLEDGE
Beta
Beta measures the volatility, or systematic risk, of an ETF (Exchange-Traded Fund) in comparison to the overall market.
A beta of 1 indicates that the ETF's price will move in line with the market, while a beta greater than 1 indicates that the ETF is more volatile than the market, and a beta less than 1 indicates that the ETF is less volatile than the market.
R-Squared
R-squared measures how closely an ETF tracks its underlying index.
An ETF with an R-squared of 1.0 indicates that it perfectly tracks its underlying index, while an R-squared of 0.0 indicates that there is no correlation between the ETF and its underlying index.
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