Net asset value (NAV): Understanding a key metric behind mutual funds & ETFs

If you've ever compared two mutual funds or exchange-traded funds (ETFs), you probably know their net asset values (NAVs) can look very different. One fund may have a NAV of $18, while another has an NAV of $95. At first glance, it might seem like the fund with the higher NAV is a better investment, or that the one with the lower NAV is a better bargain.

Neither is necessarily true.

Net asset value (NAV) is the per-share value of a mutual fund or ETF. While it's an important metric to consider, it doesn't prove one fund is a better investment than another. Understanding what NAV is, how it's calculated and what it can (and can't) tell you will help you evaluate investment options with greater confidence.

Net asset value (NAV) represents what each share of a mutual fund or ETF is worth based on the value of the fund’s underlying investments. It gives you a useful reference point for understanding that per-share value and evaluating it alongside other investment options.

If that sounds technical, think of a mutual fund as a basket filled with investments, or assets. They can be stocks, bonds or other securities. The basket has a total value based on everything inside it. It also has liabilities: expenses and other obligations it has to pay out that end up reducing its overall value. Once those liabilities are subtracted, the remaining value is divided equally among all the fund's outstanding shares. The result is the fund's NAV.

• Assets: The investments and cash the fund owns.
• Liabilities: Expenses and other financial obligations the fund owes.
• Outstanding shares: The total number of shares owned by investors.

A fund’s NAV gives you a sense of what each share is worth, but that number only tells you so much. You’ll get a clearer picture when you consider it alongside factors like the fund’s investment objective, costs and long-term performance.

If you're new to investment funds, understanding how mutual funds and ETFs work in general also can shed some light on NAV, especially since the two use it differently.

The formula for calculating net asset value is simple, and you don't need to memorize it because fund companies calculate and publish NAV for investors. It works like this:

NAV = (Assets – Liabilities) / Outstanding shares

For example, say a mutual fund owns investments worth $250 million. It also has $10 million in liabilities and 24 million shares outstanding.

(250 million – $10 million) / 24 million = $10 (NAV)

NAV changes over time because the value of the investments inside the fund changes. If the stocks or bonds the fund owns increase in value, the NAV generally rises. If those investments lose value, the NAV generally falls. Expenses and other liabilities also can affect the calculation.

The key takeaway is that NAV reflects the current value of the fund's holdings at a specific point in time. It doesn't predict where the fund will go next, but it does provide a snapshot of what each share is worth based on the fund's underlying assets.

You’ll often see NAV listed when researching mutual funds or ETFs.

With mutual funds, you buy and sell shares at the fund’s NAV, which is typically calculated once each business day after the markets close. If you place a trade before the daily cutoff, you’ll get the price calculated at the end of that trading day.

ETFs work a little differently. Because they trade on an exchange throughout the day, much like stocks, their market price can be slightly higher or lower than their NAV. For most long-term investors, those small differences aren’t a concern. Instead, you can think of NAV as a reference point for comparing an ETF’s market price with the value of the investments it holds.

Whether you’re looking at mutual funds or ETFs, NAV is just one piece of the puzzle. The bigger question is how the fund fits your goals, along with factors like its costs, risk and performance.

No. A higher NAV doesn’t necessarily mean a fund is a better investment, and a lower NAV doesn’t mean a fund is a better value.

Say you’re comparing two funds with similar investment objectives. One has an NAV of $25 and the other has an NAV of $100. It might be tempting to think the $25 fund is a better value, but NAV doesn’t work like the price tag on a product at a store.

The $25 fund doesn’t necessarily have more room to grow, just as the $100 fund hasn’t necessarily performed better. The funds may have different histories, holdings, expenses and numbers of outstanding shares, all of which can affect NAV.

So, when you’re comparing investments, look beyond NAV and consider factors like:

• Investment objective: What is the fund designed to accomplish, and does that objective align with your goals?
• Fees and expenses: How much does it cost to own the investment? Even relatively small differences in expenses can affect your investment returns over time.
• Risk level: How much volatility or potential loss are you comfortable taking on?
• Historical performance: How has the fund performed over different periods and market conditions? Past performance doesn’t guarantee future results, but it can provide useful context.
• Your overall financial plan: How does the investment fit with your other assets, your time horizon and the goals you’re working toward?

Net asset value gives you a useful snapshot of what each share of a mutual fund or ETF is worth based on its underlying assets. But it’s most useful when you consider it in context.

When comparing funds, look beyond NAV to understand the fund’s objective, costs, risk and historical performance. Most importantly, consider how the investment fits into your broader financial plan.