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Why Does an ETF Price Keep Changing?

Have you ever noticed that an ETF's price changes every second while the stock market is open? Yet, experts often talk about NAV, iNAV, and Fair Value as if they are different from the market price.

Understanding these three concepts can help you avoid paying more than an ETF is actually worth and make smarter investment decisions.

Let's simplify everything.

What is an ETF?

An Exchange Traded Fund (ETF) is a basket of investments such as stocks, bonds, commodities, or other securities that trades on a stock exchange just like a normal stock.

Instead of buying many individual stocks, investors can buy one ETF that provides exposure to an entire sector, index, or theme.

Example

Instead of buying all 50 companies in the Nifty 50 individually, you can simply purchase a Nifty 50 ETF.

This saves time, reduces costs, and provides instant diversification.

Understanding the Three Important Prices

Although you see only one trading price on your screen, an ETF actually has three different values.

1. Market Price

This is the price at which investors buy and sell ETF units on the exchange.

It changes continuously during market hours based on:

• Demand
• Supply
• Investor sentiment
• Liquidity

This is the number visible on your trading app.

2. NAV (Net Asset Value)

NAV represents the actual value of one ETF unit based on the total value of all investments held inside the fund.

It is usually calculated after the market closes each trading day.

NAV Formula

NAV = (Total Value of Assets + Income – Expenses – Liabilities) ÷ Total Outstanding ETF Units

Think of NAV as the ETF's official report card at the end of the day.

3. iNAV (Indicative NAV)

iNAV is simply a real-time estimate of the ETF's NAV.

Instead of waiting until market close, iNAV updates every few seconds using the latest prices of the securities held by the ETF.

It gives investors an estimate of what the ETF is worth right now.

Why Doesn't the Market Price Always Equal NAV?

Sometimes ETFs trade:

• Above NAV → Premium
• Below NAV → Discount

This happens because buyers and sellers determine the market price.

Fortunately, these differences are usually very small.

How ETF Prices Stay Close to NAV

The reason ETFs remain fairly priced is due to a process called Creation and Redemption.

Large financial institutions known as Authorized Participants (APs) continuously remove pricing differences.

When ETF Trades Above NAV (Premium)

If the ETF becomes expensive:

• APs buy the underlying stocks.
• They create new ETF units.
• Sell those ETF units in the market.

Result:

➡ Supply increases.

➡ ETF price falls closer to NAV.

When ETF Trades Below NAV (Discount)

If the ETF becomes cheaper:

• APs buy ETF units from the exchange.
• Redeem them for the underlying securities.
• Sell those securities.

Result:

➡ ETF supply decreases.

➡ ETF price rises toward NAV.

This mechanism keeps ETFs fairly priced most of the time.

Why Should Investors Check iNAV?

Suppose an ETF is trading at $102, but its iNAV shows the actual estimated value is only $100.

That means you're paying a 2% premium.

Similarly, if the ETF trades at $98 while iNAV is $100, you may be buying at a discount.

Checking iNAV before placing large orders can help you avoid overpaying.

Where Can You Find NAV and iNAV?

You can easily check these values on:

• AMC (Asset Management Company) websites
• Stock exchange websites
• Trading platforms
• ETF factsheets
• Financial market portals

Most exchanges update iNAV during market hours for actively traded ETFs.

Premium, Discount & Tracking Error

Premium / Discount

Shows how much the ETF's market price differs from its NAV.

Smaller differences usually indicate better pricing efficiency.

Tracking Error

Tracking Error measures how closely an ETF follows its benchmark index.

A lower tracking error generally means the ETF is performing as intended.

Simple Example

Imagine an ETF that owns stocks worth $100 per unit.

This ETF is trading very close to its actual value, which is generally a positive sign.

Now imagine:

| NAV | $100 |

| iNAV | $100 |

| Market Price | $103 |

Here, investors are paying a 3% premium.

Unless there is a valid reason, waiting for a better entry price may be wise.

Key Takeaways

✅ NAV is the official value calculated after market close.

✅ iNAV provides a real-time estimate during trading hours.

✅ Market Price is what investors actually pay on the exchange.

✅ Small premiums and discounts are normal.

✅ Comparing Market Price with iNAV helps investors make better buying decisions.

✅ ETFs stay fairly priced because of the creation and redemption mechanism.