ETFs

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how etf is calculated

The net asset value (NAV) of an ETF is calculated by multiplying the price of each asset in the underlying basket by its corresponding weighting and summing these values.

Oct 13, 2024 at 08:12 am

How ETF is Calculated

1. Creation of Underlying Basket

The ETF provider constructs a basket of stocks, bonds, or other assets that reflect the desired investment strategy.
The composition and weightings of the assets in the basket determine the overall performance of the ETF.

2. Pricing of Individual Assets

Market prices for each asset in the basket are obtained in real-time.
These prices are constantly changing based on market demand and supply.

3. Net Asset Value (NAV) Calculation

The net asset value (NAV) of the ETF is calculated by multiplying the price of each asset in the basket by its respective weighting.
Summing these values together provides the total value of the ETF's underlying assets.

4. Distribution of Trading Units

The ETF is divided into shares, each representing a fractional ownership in the underlying assets.
The number of shares outstanding is adjusted based on the demand for the ETF in the secondary market.

5. Market Price Determination

The market price of the ETF is determined by the forces of supply and demand in the secondary market.
Buyers and sellers place orders for ETF shares, which influence the price.

6. NAV vs. Market Price

During trading hours, the ETF's market price may deviate from its NAV due to market forces.
Market makers help balance supply and demand, ensuring the ETF's market price closely tracks its NAV.

7. Daily NAV Adjustments

Typically, twice a day (e.g., at market open and close), the ETF's NAV is updated based on the closing prices of the underlying assets.
This ensures that the ETF's market price stays aligned with its intrinsic value.

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