What is an iNAV?

An investment's indicative Net Asset Value (iNAV) offers an almost real-time indication of an ETF (Exchanged Traded Fund) value on the Basis of its Market value. It is reported per 15 seconds on average. It provides investors with a daily indication of the investment's value.

iNAV Formula and Calculation

A computation agent, usually the exchange where the investment is traded, reports the iNAV. Both ETFs and closed-end Mutual Funds can report an iNAV.

The iNAV is calculated in the same way as a fund's Accounting NAV. To calculate the total asset value, the calculation agent will use the established prices of all assets in the Portfolio. Throughout the day, calculation agents can access the fund data to generate the iNAV every 15 seconds.

The agent multiplies to find the last available price of every security in the calculation basket and the number of shares in the calculation basket to arrive at iNAV. The totals are added with the cash components, while liabilities are deducted. The calculating agent divides the final result by the number of ETF shares in a creation unit to convert the result to a "per share" value.

Here's a quick rundown of the equation:

iNAV = ( (Sum of (shares in every security x final price) / FX Rate ) / ETF Shares) + (Estimated cash component / ETF shares)

The resulting index, iNAV, is a wonderful place to start if you're thinking about trading an ETF intraday. Remember that iNAV represents an ETF's "fair" pricing; thus, paying significantly more or receiving substantially less than iNAV is generally not a good idea.

Difference between iNAV and NAV

The iNAV is a technology that assists in keeping funds trading close to par value. It provides a near-real-time view of a fund's value, with iNAV reports every 15 seconds. A fund's ability to avoid excessive premium and discount trading can be aided by reporting an iNAV.

Due to their position as mutual fund investments under the Investment Company Act of 1940, ETFs and closed-end funds calculate net asset values. While the funds calculate a daily net asset value, they trade like stocks on the Open Market, with transactions taking place at market price.

Discounts and Premiums Associated with iNAV

As closed-end funds and exchange-traded funds (ETFs) trade on a stock exchange, they frequently offer a premium or discount to their NAV. The iNAV can assist in keeping funds trading as close to their accounting value as possible (although deviations still occur).

Premiums and discounts can happen for various reasons, and they're a common occurrence for many funds. When investors are bullish on a fund's Underlying holdings or have a positive outlook on the fund's management, a premium may be paid. Investors who are negative about the fund or distrustful of the fund's management are more likely to get a discount. The fund's exchange trading price is also affected by supply, demand, and the timeliness of financial market reporting.

Limitations of iNAV

When an ETF trades in a different time zone than its underlying stocks, iNAV has the first constraint. In this situation, the shares' "last price" will be determined by the previous day's close. As a result, the "latest price" used in the iNAV calculation is essentially "stale," reducing the accuracy of the iNAV computation. This is a shortcoming that both iNAV and NAV have.

The second drawback of iNAV is that it is only broadcast every 15 seconds. This latency may mislead the ETF's actual value in highly volatile markets.

Fair Valuation of iNAV

While iNAV is the best single data point you can get, some market participants try to get around the stale-price problem and the 15-second wait by using other methods. It's referred to as "fair valuation."

Market makers, authorized participants, and liquidity providers who trade ETFs frequently undertake their fair Valuation In-House. Essentially, the procedure entails taking iNAV a step further. For underlying securities that aren't currently trading—and hence don't have perfect price discovery—liquidity providers will employ a proxy to obtain the best approximation of Fair Value.