Three of the most important terms are as follows:
“Intraday Indicative Value (IIV): An Intraday Indicative Value is published by NYSE Alternext US for each ETF as a reference value to be used in conjunction with other ETF market information. The Intraday Indicative Value for an ETF is typically published under a separate symbol every 15 seconds over the Consolidated Tape and calculated throughout the trading day based on the last sale prices of the securities specified for creation and redemption plus any estimated cash amounts associated with the creation unit, all on a per-ETF share basis. This value is also referred to as an "Underlying Trading Value", "Indicative Optimized Portfolio Value (IOPV)", and "Intraday Value", in various places such as the prospectus and marketing materials for different ETFs. The Intraday Indicative Value is designed to give investors a sense of the relationship between a basket of securities that are representative of those owned in the ETF and the share price of the ETF on an intraday basis.
Net Asset Value (NAV): The NAV of an ETF is determined in a manner consistent with other mutual funds. The NAV is calculated by taking the total assets of the ETF, less liabilities, divided by the number of ETF shares outstanding.
Premium/Discount: The amount (stated in dollars or percent) by which the selling or purchase price of an ETF is greater than (Premium) or less than (Discount) its face amount/value or net asset value (NAV). See also.Net Asset Value”
Why are these three terms important? Because they can help investors analyze the potential risk/reward of any given ETF. Let’s examine the NAV of two different ETFs: GLD which is the long gold ETF, and the UPRO, which is the leveraged 3X long S&P 500 ETF.
According to ProShares, the underwriter of UPRO, investors must keep in mind that NAV for ETFs can have both premiums and discounts built into the price:
“Don’t confuse market price with NAV. ETF performance is tracked using net asset value (NAV). But investors purchase and sell ETFs at market price. Although an ETF’s market price, its NAV, and its intraday values (real-time estimates of NAV) are typically close, these values may differ—especially in volatile markets (see ETF Pricing Guide). During the trading day the market price is usually close to the intraday value, and at market close it is usually close to the NAV, but these values may diverge.
The result: the performance you experience, which is based on market prices, can differ from stated performance, which is based on NAV. This difference arises because you may have purchased or sold your ETF shares at a premium or discount to the NAV.”
Layman’s Translation: In a fast moving market, on a hot ETF such as GLD, the NAV can accelerate due to market volume and one will often pay a lofty premium for the privilege of “hopping on a fast moving train”. The danger lies in the fact that if GLD is trading at a premium to NAV, and the price of gold moves sharply downward, then the loss will be accelerated.
Logic would have it that hot funds will have premiums built into the price, and funds with less visibility will either trader closer to the NAV or perhaps at a discount.
In a previous article, I wrote that patience is a virtue in trading the SPXU and the UPRO. For example, the idea would be to get in on SPXU close to a market top, when the market is running up and traders are piling in on momentum and moving money into long positions. UPRO would be approached in the same manner, just on the short end of the market. The best way to identify such situations is to examine a chart that shows money flows into the fund. I trade with what I consider to be the worst platform on planet earth, that being Wells Fargo-- but they do have a fairly good live portfolio platform that allows for the examination of money flows.
Disclosure: I am long SPXU.