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What is an ETF?

An ETF, or exchange-traded fund, is a marketable security that tracks a stock index, a commodity, bonds, or a basket of assets. Although similar in many ways, ETFs differ from mutual funds because shares trade like common stock on an exchange. The price of an ETF’s shares will change throughout the day as they are bought and sold. The largest ETFs typically have higher average daily volume and lower fees than mutual fund shares which makes them an attractive alternative for individual investors.

While most ETFs track stock indexes, there are also ETFs that invest in commodity markets, currencies, bonds, and other asset classes. Many ETFs also have options available for investors to use income, speculation, or hedging strategies.

ETF Net Asset Value vs. ETF Market Price: An Overview

Unlike mutual funds, which price quarterly or even yearly, exchange-traded funds (ETF) price daily. So how are they priced, and what is the difference between market price and net asset value (NAV)?

ETF Market Price

An exchange-traded fund’s market price is the price at which shares in the ETF can be bought or sold on the exchanges during trading hours.

ETF Net Asset Value

The net asset value of an ETF represents the value of each share’s portion of the fund’s underlying assets and cash at the end of the trading day. ETFs calculate the NAV at 4:00 p.m. Eastern Time, after the markets close.

[Important: The NAV is determined by adding up the value of all assets in the fund, including assets and cash, subtracting any liabilities, and then dividing that value by the number of outstanding shares in the ETF.]

The NAV is used to compare the performance of different funds, as well as for accounting purposes. The ETF also releases its current daily holdings, amount of cash, outstanding shares, and accrued dividends, if applicable. For investors, ETFs have the advantage of being more transparent. Mutual funds and closed-end funds do not have to disclose their daily holdings. In fact, mutual funds usually disclose their holdings only quarterly.

There may be differences between the market closing price for the ETF and the NAV. Any deviations should be relatively minor, however. This is due to the redemption mechanism used by ETFs. Redemption mechanisms keep an ETF’s market value and NAV value reasonably close. The ETF uses an authorized participant (AP) to form creation units. For an ETF tracking the S&P 500, an AP would form a creation unit of shares in all the S&P 500 companies in a weighting equal to that of the underlying index. The AP would then transfer the creation unit to the ETF provider on an equal NAV value basis. In return, the AP would receive a similarly valued block of shares in the ETF. The AP can then sell those shares in the open market. The creation units are usually anywhere from 25,000 to 600,000 shares of the ETF. 

List of Cannabis ETFs

  • Horizons Marijuana Life Sciences Index ETF (Ticker: HMMJ – TSX)
  • Horizons Junior Marijuana Growers Index ETF (Ticker: HMJR – NEO)
  • ETFMG Alternative Harvest ETF (Ticker: MJ – NYSEARCA)
  • Evolve Marijuana ETF (Ticker: SEED – TSX)

Source: Investopedia (what is ETF), Investopedia (Comparison)