Glitch Differentiates Mutual Funds From ETFs

August 27, 2015

The latest technological glitch to hit the fund market this week offers a prime opportunity to take a closer look at product structure. At the heart of the discussion is the importance of a single metric: net asset value.

The Wall Street Journal reported today that a computer glitch originating at the Bank of New York Mellon Wednesday was hindering pricing in various mutual funds and ETFs. The problem with calculating funds’ net asset values impacts investors across the board, but not in equal measure.

How much do NAVs matter to investors? The answer is that it depends on whether you own mutual funds or ETFs.

A fund’s NAV is the sum of all its assets less any liabilities, all divided by the number of shares outstanding. It’s the closest measure of the fair value of a single share of the fund.

Fundamentally speaking, the biggest difference between mutual funds and ETFs when it comes to net asset value is what NAV is used for.

NAVs Crucial For Mutual Fund

With mutual funds, NAVs are really important because all transactions, whether they amount to $100 or $1 million, happen at NAV. Mutual fund investors can only buy or sell positions once a day, after the close of trading, at the fund’s net asset value. And these transactions happen between the investor and the fund company.

“If the NAV is off by a penny, it’s a huge deal [in a mutual fund],” Dave Nadig, director of ETFs at FactSet, said. “Trades have to be re-struck, or at minimum, investors have to be made whole.”

In other words, Wednesday’s computer glitch means mutual fund issuers have to now scramble to unwind or reprice trades.

More A Benchmark For ETFs

In an ETF, trading happens all day long, and not at NAV necessarily. Unlike mutual funds, ETFs trade at a premium or a discount to its NAV at any given moment. NAV is really only used to gauge performance.

“With very few exceptions, none of the trading in an ETF happens at NAV, and nothing but authorized participant transactions happen with the issuer,” Nadig said. “The NAV is essentially irrelevant even for the AP. The AP shows up with a basket of stocks, they get a proscribed number of shares. The NAV doesn't factor into it.”

To be fair, as one ETF expert pointed out, the NAV matters to the AP to the extent that transactions in the primary market occur at NAV. But, in the bigger scheme, even if the impact of NAV mispricing is somewhat muted in ETFs, the relevance of this glitch isn’t. It points to a crack in market structure, and at a time of huge market volatility.


Contact Cinthia Murphy at [email protected].

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