What is a fund, and what is its NAV?
Most of the money in markets does not hold shares directly. It holds a slice of a fund — a pool that holds the shares, and issues its own units to the people who put money in. The allocation course used funds as building blocks without asking what they are; this course opens the box, because the wrapper decides more about your return than most people assume.
One number underneath everything: net asset value
A fund owns things: shares, bonds, cash, sometimes futures. Add up what they are worth at today's prices, subtract what the fund owes, and divide by the number of units in issue. That is the net asset value per unit, or NAV — what one unit is worth, as opposed to what someone will pay for it.
Every fund computes it at least once a day. It is the one figure you can always hold a fund's price against, and the next lesson is entirely about the gap between the two.
The three wrappers
The same pool can be sold to you in three shapes, and the shape decides how you get in and out.
- A mutual fund sells and buys back its own units once a day, at that day's NAV. You never trade with another investor; you deal with the fund. Orders placed during the day fill at a price nobody knows until the evening.
- An exchange-traded fund (ETF) lists its units on an exchange, so you buy and sell them like a share, all session long, at whatever price the market agrees on. The fund itself deals only in large blocks with a handful of specialists — the mechanism the third lesson explains.
- A closed-end fund issues its units at launch and has no daily mechanism to add or cancel them afterwards — a rights issue or a buyback can change the count, but nothing does so every day. The units trade between investors only, and the price and the NAV can drift far apart for years.
Same underlying holdings, three different answers to "what do I pay and who do I pay it to". The ETF's answer is the reason it became the default wrapper for the index funds you met in the players lesson.
Where the money comes and goes
A mutual fund's size changes every day with subscriptions and redemptions, and the manager has to buy or sell holdings to match — which is why a fund facing heavy redemptions sells into a falling market. An ETF's size changes only when a specialist creates or redeems a block; ordinary buyers and sellers trade the existing units between themselves and the fund does nothing at all. A closed-end fund's size changes only through a deliberate corporate action, never through the daily flow of buyers and sellers — which is precisely what lets its price wander from its value.
In the data
A fund has a ticker like a share, but its record reads differently: no revenue or profit, instead the index it tracks, the day it started, what it charges and how big the pool is. The oldest US ETF:
The total assets line is the whole pool at today's prices. Divide it by the number of units in issue and you would have the NAV per unit; the price on the chart below is something else, agreed between buyers and sellers.
Try it now
Read the index tracked, the inception date and the total assets off the record above — that is a fund's identity card.
Now the chart of what those units have done since you could first buy one, and notice that the line is a price, agreed between buyers and sellers, not a NAV:
- For each wrapper — mutual fund, ETF, closed-end — say who you deal with when you sell. If two of your answers are the same, reread the section above.