Discount to Net Asset Value

What Is Discount to Net Asset Value?

A discount to net asset value is a pricing situation that occurs when an exchange-traded fund (ETF) or mutual fund’s market trading price is lower than its daily net asset value (NAV). Several factors may trigger a discount, including instances where the market has a pessimistic future outlook on the underlying holdings of a fund.

Discount to NAV can be contrasted with premium to NAV.

Understanding Discount to Net Asset Value

A discount to net asset value can occur with closed-end mutual funds and ETFs as both of these investments trade on the open market and calculate a daily NAV. A discount to NAV surfaces when the market trading price is lower than the most recent NAV. A discount often indicates the market is generally bearish on the investments in the fund and the fund company’s potential to generate returns.

The NAV of a fund is calculated after the close of each trading day. It is considered a forward price NAV since it accounts for all transactions that have occurred since the previous day’s price calculation. The NAV is the value of the fund’s total assets at market close, minus the fund’s liabilities, divided by the total number of shares outstanding.

Closed-end funds and ETFs trade on exchanges with transactions occurring at a market value — an arbitrary price that is determined by market participants. When the fund trades above its last quoted NAV it is trading at a premium. When it trades below its last traded NAV it is trading at a discount.

Fund companies often provide historical records of a fund’s premium and discount trading.

Profiting from a Discount to Net Asset Value

A fund trading at a discount to NAV offers an opportunity to profit. A discount signals that investors, maybe wrongly or rightly, find the securities in the fund to be valued below their comprehensive NAV value. This can occur throughout the day from bid-ask spread variance and the price of underlying securities falling due to negative market news, among other things.

In many cases, a premium or discount may be due to slight variations in the market pricing of the securities within the fund. The NAV is calculated once per day while the securities trade nearly 24 hours a day around the world.

Closed-end funds tend to trade with higher volatility from their NAV than ETFs. That's because ETFs have authorized participants that actively follow the shares and take action to reconcile the price in the open market when it deviates from the NAV.

Closed-end funds do not have such mechanisms and offer greater opportunities for arbitrage. If a discount does occur, investors can profit from the discounted price and also gain yield benefits from a lower price on income paying securities.

Special Considerations

Most closed-end fund managers report both the day’s market price and NAV in their marketing materials. They also often provide historical records of premium and discount market levels versus NAV.

The Guggenheim Enhanced Equity Income Fund provides one example. On December 13, 2017, the fund’s market price was $8.97, versus the NAV price of $9.15, resulting in a -1.97% discount. On that same date, the fund also reported a 52-week average discount of -4.04%.