Premium and discount: when price and value split

Trading Basics · Lesson 4 of 71234567

The question

How far can an ETF's price stray from what it holds, and does that cost me?

The idea

• Lesson 1 showed that an ETF has a market price and a NAV (the basket's worth divided by the number of shares). When the price is above the NAV, the fund trades at a premium: you pay more than the holdings are worth. When it is below, it trades at a discount: a seller gets less than they are worth.

• Premium or discount = (price − NAV) ÷ NAV.

• US rules (SEC Rule 6c-11) require every ETF to publish this gap on its website daily. In most large funds it stays tiny, because authorized participants (APs, lesson 1) create shares when the price is high and redeem them when it is low. When they are slow or missing, the gap can grow.

Worked example

The 5 steps beside the drawing at the top work this through on ETFIQ data. Point at a step to light the part of the drawing it describes.

Two ProShares ETFs from lessons 2 and 3, NOBL and TINY, over the 250 trading days to Nov 10, 2026.

The common mistake

"A discount means a bargain." You pay less than the holdings are worth today, but you may sell at a discount too. In a fund with no active APs, nothing makes the gap close. A discount is a sign to look closer, not a free gain.

Check your understanding

Pick an answer to see why. Two of three right passes the lesson.

1. A fund's NAV is $40.00 and its price is $39.80. What is it trading at?A A 0.5% premiumB A 0.5% discountC A 0.2% discountD A 20% discountAnswer: B. A 0.5% discount. ($39.80 − $40.00) ÷ $40.00 = −0.005, a 0.5% discount, since the price is below the NAV. Not C: 0.20 is the gap in dollars, not the percentage.2. You buy $10,000 of a fund at a 1% premium. A week later the NAV is unchanged and the fund trades exactly at NAV. About what is your stake worth?A $10,000B $10,100C $9,900D $9,000Answer: C. $9,900. at a 1% premium your $10,000 bought about $9,900 of holdings ($10,000 ÷ 1.01), and that is what you can sell for at NAV. Not A: the price fell back to the NAV, so the extra 1% you paid is gone.3. TINY had no active APs in its latest filing year. Why does that help explain its large gaps?A Nobody is creating or redeeming shares, so nothing pulls the price back to the NAVB The fund sets its own price each morningC APs cause premiums, so fewer APs means more of themD Its NAV is only worked out once a yearAnswer: A. Nobody is creating or redeeming shares, so nothing pulls the price back to the NAV. APs close gaps by creating shares when the price is high and redeeming when it is low; without them the gap can last. Not C: APs shrink gaps, they do not cause them.

Takeaways

• Premium or discount = (price − NAV) ÷ NAV; multiply by your amount to see it in dollars.
• Check a fund's record, not just today: how wide its usual range is, and how many days it strayed past 1%.
• A gap paid on the way in can be lost on the way out, even when the holdings never move.

Do it on ETFIQ

See your fund's premium historyYour fund