Net Asset Value (NAV)

Fundamentals of Market Investing by Adam J. McKee

“Investment vehicles” such as REITs, ETFs, and mutual funds are just buckets that hold numerous underlying investments.  These can hold a very wide variety of investment types including stocks, bonds, real estate, and other (even exotic) assets.  When we add up the total value of these holdings and divided by the number of outstanding shares, the result is referred to as the net asset value (NAV).  The NAV represents the price per share that investors would have to spend in order to buy a single share of the fund.

The NAV per share is calculated once a day for open-end mutual funds, based on the closing market prices of the securities in the fund’s portfolio (this lack of speed can be very annoying to those of us with stock market experience).  Buy and sell orders are processed at the NAV of the trade date.  Buyers must wait until markets open the following day to buy at that price.  Because ETFs trade in the market like stocks shares trade at market value, which can be a value above (when it is said to be trading at a premium) or below (when it is said to be trading at a discount) the NAV.  In the past, perceptive investors could use market panics to buy these closed-end funds when they were selling below their NAV, which is by all accounts a discount.  These sorts of opportunities are very rare in these days of electronic trading.

Most investors believe that since most “pooled investment vehicles” pay out virtually all of their income and capital gains, changes in NAV are not the best gauge of mutual fund performance.  The most popular metric, then, is annual total return.  Total return is the percentage that an investor makes from a security over a year-long period after all distributions are reinvested.

Total return is always interpreted as a percentage of the sum originally invested.  For example, a total return of 10% means the security increased by 10% of its starting value due to a price increase, distribution of stock dividends, bond coupon, and fund capital gains.  Total return is a good measure of an investment’s total performance so long as the investor actually chooses to reinvest.  NAV does not reflect the fact that you own more shares now and thus underestimates the performance of your portfolio.  One of the most common mistakes made by novice investors is to consider price appreciation of assets as the sole measure of performance.  The income of investments must always be factored into your appraisals of your portfolio’s performance.

[ Back | Contents | Next ]


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.