Last week, the U.S. Securities and Exchange Commission proposed eliminating the intraday net asset value (or iNAV) from exchange-traded funds. While this won’t have big implications for those who use ETFs as long-term investment vehicles, it could have an effect on traders who use ETFs on a daily basis.
According to the NYSE, the average daily trading volume of all U.S.-listed ETFs is 1.3 billion shares worth $83.5 billion. Here’s a look at what the SEC is doing and what the changes could mean for traders.
We all know that NAV is simply the total per-share market value of all the assets held in a fund. NAV is calculated by adding up the total value of all the holdings in the fund, subtracting out the fund’s liabilities, and then dividing by the number of outstanding shares of the ETF. It’s typically calculated at the end of the day.
However, the total value of a fund’s holdings is constantly fluctuating throughout the trading day. And so is the price of the fund. To account for this, traders looking to make quick moves in and out of ETFs use iNAV, which shows a real-time representation of the fund’s NAV. This helps them can get a clearer indication of whether an ETF is overvalued or undervalued right now.
Typically, ETFs report their iNAV every 15 seconds, but a new SEC proposal would allow funds to report NAV only once a day. The justification for the change is that real-time NAV calculations are rarely accurate and are a major burden for funds to report.
It’s easy to see why a change in an ETF’s net asset value over a 15-second stretch could be inaccurate. For example, the SPDR S&P 500 ETF (SPY) holds 500 different extremely liquid stocks. With each stock constantly moving and 500 different share prices used to calculate NAV, there’s an extremely high degree of noise in the real-time NAV.
In addition, according to ETF.com, about 80 percent of real-time NAV reports are simply inaccurate. This can be especially true if an ETF holds securities that are extremely volatile, as the constant fluctuation makes it difficult for the calculations to catch up.
While the SEC would likely argue that no information is better than information that is likely inaccurate, the proposed elimination of iNAV reporting could discourage some traders who use ETFs as part of their daily strategy. For example, a trader using a market neutral strategy may be less inclined to hedge with ETFs if the NAV gets too far out of whack with the price of the fund. And if enough traders feel this way, it could potentially negatively impact liquidity, which could increase slippage on trades.
The SEC will likely make a decision on the intraday NAV proposal shortly after the end of the public commentary period on October 1.
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