Alas, it’s not, really, and it’s important to understand why.
The Two Biggest NAV Myths
Myth 1: NAV is the portfolio holdings divided by the number of shares in the fund or ETF
Let’s start with the biggest myth of all, which is that NAV is a snapshot in time of precisely what’s going on in a fund. Unfortunately, that’s not really the case.
Imagine you’re an active equity fund manager. You start the day 100% in Apple, but right on the open, you decide to sell your 100% Apple position and buy Microsoft instead. At 4:00 p.m., the market closes, and you have to report your NAV. During the day, Apple was up 10% and Microsoft was down 10%. What happens to your NAV?
You report the fund up 10%.
Sounds insane? Well, standard mutual fund accounting practice is that trades are included in the portfolio for NAV purposes on the day after trade date. The logic is that until a trade is actually affirmed overnight through the National Securities Clearing Corp.’s continuous net settlement process, it’s not a “real” trade. It’s not done. Theoretically, the trade could be unwound for some reason. While it rarely happens, back before computers, it happened all the time.
So what happens if a mutual fund investor puts in an order to buy new shares that day? Well, the NAV will be inflated, and they’ll actually get fewer shares than they might otherwise. Of course, a seller would get more cash than they might otherwise.
In the real world, few mutual funds make huge position changes that have meaningful impacts on NAV, but this is, in fact, how the math works, and it makes NAV, at best, a “good guess” as to what the portfolio is worth. Today’s NAV is always, in fact, yesterday’s closing portfolio, marked to today’s closing prices.
Myth 2: NAV is what all the securities are worth
Even putting aside the first myth, NAV is still just a very good guess on valuation. Let’s imagine you run an S&P 500 index mutual fund. There have been no additions or dividends or anything else that requires any trading in days, so the previous myth is irrelevant. At the end of the day, what’s your NAV?
Well, there’s a very specific definition (SEC rule 270.1a-4), which says: