What is '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.

BREAKING DOWN 'Premium to Net Asset Value'

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 arise from optimistic sentiment towards a fund company, investment strategy or individual fund management team.

Premium Investing

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 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.

Fund Performance

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%.

RELATED TERMS
  1. Investment Fund

    An investment fund is the pooled capital of investors that enables ...
  2. At A Premium

    At a premium is a phrase attached to a variety of situations ...
  3. NAV Return

    The NAV return is the change in the net asset value of a mutual ...
  4. Asset Value Per Share

    Asset value per share is the total value of an investment or ...
  5. Mutual Fund Timing

    Mutual fund timing is the practice of trading mutual funds according ...
  6. Management Investment Company

    A management investment company is a type of investment company ...
Related Articles
  1. Investing

    Closed-End Vs Open-End Funds

    Much like an individual’s wardrobe, many portfolios are collections of separate items. They combine stocks and bonds and other investments into one product.
  2. Investing

    How to Calculate the Value of an ETF

    An ETF is a good way to get broad exposure without taking on specific risk, but calculating performance may be a bit tricky.
  3. Investing

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  4. Investing

    The Benefits of Dollar-Cost Averaging Explained

    Implementing dollar-cost averaging as an investment strategy has several benefits.
  5. Financial Advisor

    Using Closed-End Funds To Build Your Core At A Discount

    Closed-end funds offer portfolios a chance to buy assets at discounts to intrinsic values. This is most apparent in the blue-chip stock space.
  6. Investing

    Mutual Funds: Does Size Really Matter?

    The growth of mutual funds isn't always cause for celebration. Read on to find out why.
  7. Investing

    ETF Strategy: The Short-Term Corporate Bond (VCSH)

    One ETF option for investors who want to target short-term corporate bonds is the VCSH ETF. We examine the fund’s returns.
  8. Financial Advisor

    AMECX: Overview of Income Fund of America

    Learn about the American Funds Income Fund of America, a moderate-allocation fund that focuses on safe income strategies while providing capital growth.
RELATED FAQS
  1. How often are mutual fund prices updated?

    Learn how often mutual funds must report their price, or net asset value: daily for open-ended registered investment companies. Read Answer >>
  2. How is NAV used for oil, gas, and energy investments?

    Find out how net asset value, or NAV, can be useful for evaluating mutual funds with oil, gas and energy investments or valuing ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center