Premium to Net Asset Value

Premium to net asset value (NAV) is a pricing situation that occurs when the value of an exchange-traded investment fund is trading at a premium to its daily reported accounting NAV. Funds trading at a premium will have a higher price than their comparable NAV.

A premium to NAV can occur with any investment fund that trades on an exchange and also reports a daily NAV. Most commonly, this refers to closed-end mutual funds and exchange-traded funds (ETFs). Identifying funds trading at a premium or discount to their NAV requires considerable market information.

Closed-end mutual funds and ETFs calculate a NAV at the end of each trading day. The NAV represents the price of all of the fund’s assets minus the fund’s liabilities divided by the number of shares outstanding. Funds typically also report an intra-day NAV. Since a fund’s NAV only represents the total value of the assets in the fund at the end of the day, there is significant latitude for funds trading on exchanges to fluctuate from their NAV.

In the case of a premium to NAV, the fund will be trading above its representative NAV. A premium to NAV can be caused by numerous market factors. Throughout the day the securities in the fund may report news or financial information that positively influences its price. A particular sector may also be reporting a positive trend that can affect funds managing assets in that sector. Premiums may also rise from optimistic sentiment toward a fund company, investment strategy or individual fund management team.

A premium to NAV is most often driven by a bullish outlook on the securities in a fund. Investors are generally willing to pay a premium because they believe securities in the portfolio will end the day higher. Retail investors often do not have extensive data on all of the underlying holdings of a fund. Highly diversified funds may also cause disconnect between the NAV and market value price, providing greater flexibility for the market price to trade at a premium. Overall, the reporting of the intra-day NAV can be highly influential in determining the fund’s price divergence and its cumulative premium to NAV calculations.

Open-end exchange-traded investment funds have a greater ability to manage the deviations of a fund from its NAV. ETFs in particular have authorized participants who actively monitor the price of an ETF in comparison to its NAV. Authorized participants have the authority to create or redeem shares of open-end ETFs in order to manage the product’s price volatility.

Most closed-end funds and ETFs will provide performance reporting that includes both the NAV return and the market value return. The Guggenheim Strategic Opportunities Fund provides one example of a closed-end fund. The Fund’s investments are based on both quantitative and qualitative analysis. Investments span across asset classes including fixed income, equity and preferred stock. As of January 9, 2018, the Fund was reporting a 10.21% premium to NAV. Its closing NAV on January 9 was $19.78 versus a closing market value price of $21.80. The Fund also has a 52-week average premium of 6.54%.