Value vs Price

Investors can buy and sell ETPs on an exchange through a broker, the same way as shares, using a typical bid/ask spread at the time of the trade, which usually differs from the ETPs Net Asset Value (NAV).

ETPs are open-ended instruments, which means that ETPs can be created and redeemed to match investors demand, which helps the price of the units to stay close to the Net Asset Value of the ETP. This differs from shares in a company, where the price fluctuates based on investor’s demand.

Generally, during the trading day the price of an ETP will be determined by how much the underlying asset has risen or fallen from its closing price the day before.

The price of an ETPs should be close to the NAV per unit, but at times, when the underlying assets prices undergo large changes, the price of the ETP could move away from the NAV.

ETP Net Asset Value (NAV)

Basically, an ETP NAV is the sum of all its underlying assets, less liabilities, all divided by the number of securities and is generally an indication of the fair value of the ETP.

An ETP calculates its official NAV at the end of each day using closing market prices of its underlying asset (i.e., from the closing price of the underlying asset in a given day to the next day’s close).

In theory, the price of an ETP should be determined by its NAV divided by the number of securities. The NAV will fluctuate depending on the price movements of the underlying assets which, in turn, will alter the price of each ETP security.

Tracking overseas instruments during EU hours

Challenges arise when an ETP holds securities trading in a different time zones, because the NAV is based on the last price when the exchange for the underlying asset closes.

For example, an ETP that trades on the London Stock Exchange (LSE) but tracks Tesla which trades in the U.S., will hold securities trading on the NASDAQ. When the LSE closes at that point the ETP’s closing price is “struck.” However, for another 5 hours, the underlying Tesla shares will still be trading on the NASDAQ.

Usually, a lot happens during those 5 hours that could affect the value (NAV) of the ETP. However, the closing price of the ETP will remain unchanged/stationary because the LSE is closed, and only the ETP’s NAV will reflect any changes in value over the 5 hours. In this case, the ETP’s NAV has changed, but the closing price of the ETP has not. As a result, a difference between the ETP’s closing price and its NAV can appear as shown in the diagram below.

In conclusion:

It is crucial to understand that the NAV is the only reference price which will accurately provide the relationship between the underlying asset’s performance and the ETP’s performance. Therefore, when comparing the performance of the ETP to its underlying, the previous NAV must be used as reference point.

Because the end of day NAV is calculated when the U.S. exchanges close, not when the ETP was last traded on the European exchange, there is discrepancy between the ETPs price and the NAV.

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