Premium and discount — the price you pay may not be the value you get
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An ETF trades on supply and demand like any share — so its price can drift from what its holdings are actually worth.
NAV: what is actually inside
Net asset value is everything the fund holds, divided by shares outstanding — what one share is genuinely worth.
An estimate is often published through the trading day. Trade above it and the fund is at a premium; below it, a discount.
Expressed as a percentage, that gap is the premium/discount.
Why the gap opens
Normally market makers close it: too expensive and they create new shares to sell, too cheap and they buy them back. Day to day the gap stays tiny.
It widens when that mechanism cannot work. A fund holding foreign assets has a frozen underlying price while that market is shut — if local buyers pile in, only the traded price moves.
Thinly traded funds, illiquid underlyings and fast-moving markets all stretch it too.
What buying at a premium does
Buy at a premium and you paid more than the holdings are worth. When the gap normalises, your position falls even if the underlying has not moved.
Oil-linked products have done this dramatically: expectations of a rally pushed prices far above asset value, and late buyers lost the difference.
Being right about direction does not help if you overpaid on the way in — the premium eats the call first.
How to check
Brokers and exchange disclosures publish the figure. Glancing at it before you buy, to see it is not unusually wide, is enough.
Take particular care buying a locally listed fund on a foreign index while that market is closed.
Quotes are thinnest just after the open and near the close, which is when gaps stretch. If you are not in a hurry, avoid those windows.
This article is general information, not investment advice. Investment decisions and responsibility are your own.