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What are “Discount” and “Premium” for Funds (ETFs and Closed End)? Why do I love Discount and hate Premium? October 30, 2007

Posted by deminvest in etf, investment, investment strategies.
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@nav, I hope this answers your comment

All funds own assets. Those assets (stocks, bonds, cash…) have a value. Once you subtract the fund’s liabilities you get a very important number:
Net Asset Value (NAV). For a fund that only owns shares, the NAV is the sum of the values of all shares belonging to the fund.

Some Funds (ETF and Closed End) are freely traded on stock markets. Their prices go up or down like anything else on markets. Since the price of a freely traded fund is free to change, there can be a difference between the price of a fund and its NAV.

When the price of a fund is lower than its NAV, you can buy the fund with a Discount.

When the price of a fund is higher than its NAV, you can only buy with a Premium.

I love to buy at Discount because I spend less than that price of the shares inside the fund.

Example:

let’s imagine the fund “Indian Elephant Fund” which owns:

  • 1000 shares of Indian stock A worth $2 each and
  • 2000 shares of Indian stock B worth $3 each.

Net Asset Value (NAV) of this fund is $8000 ($2000 worth of stock A + $6000 worth of stock B)

Let’s imagine that the Fund is made by 1000 units traded on the NASDAQ. If for some reason those units were traded on the NASDAQ at $6 each, we would say that:

“Indian Elephant Fund” is traded at Discount. in the example the Discount would be 25%

If those units were traded at any price higher than 8, we would say “Indian Elephant Fund” is trading at Premium.

Comments»

1. SG - November 8, 2007

Thank you. This information is very helpful.

Looking back at the stocks you bought in 2007, wow, most of them have 100%+ performance!

2. SG - November 8, 2007

So I checked EFA:
http://finance.google.com/finance?q=NYSE:EFA

Total Equity=46,326.55M
Shares: 164.5M
NAV=281 while price of fund is ~83.
Anything wrong with my calculation? Does this mean EFA is a strong buy?

3. deminvest - November 8, 2007

SG, maybe it is because 2007 was a good year for stock-markets… so far! 🙂

Regarding EFA, NEVER TRUST GOOGLE FINANCE AND YAHOO FINANCE for funds. They simply give wrong numbers. You can trust them only for numbers (that are a few weeks old) on stocks of large companies. You should at least look on both to make sure numbers are similar.

EFA is an ETF.

I find accurate data about closed end funds on:
http://www.cefa.com/FundSelector/fundcompare.fs

I have not yet found any source for good data about ETF.

Not trusting anybody is a golden rule for small investors like us. Regarding performance of stock I picked in 2007, remember that any Blogger can Post anything with any timestamp.

I could write now a post dated January 5 2007 saying that I bought RIMM stock (I wish I had!). I don’t do it but it is my word. You don’t know me and you have no reason to believe me.

Never trust anybody with your investment decisions. Think with your own head, double-check all info. I often make mistakes and I am not a professional and have little time to do research, so I could give wrong numbers by mistake.

4. amva - October 23, 2011

Thank you , I think you should write a book on ETFs because you can explain evertything very clearly in a few sentences

5. Why Do Investment Trusts Trade At A Discount | Bitcoin Success - September 9, 2014

[…] What are “Discount” and “Premium” for Funds (ETFs … – 2007-10-30 · What are “Discount” and “Premium” for Funds (ETFs and Closed End)? Why do I love Discount and hate Premium? October 30, 2007 Posted by deminvest in …… […]


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