What you will learn
- Distinguish fund ownership from the dealing mechanism.
- Calculate an illustrative premium to net asset value.
Exchange-Traded Fund (ETF)
Most ETFs are passive and aim to follow an index by holding its securities, either all of them or a representative sample, or by using derivatives. Large dealers called authorized participants (participating dealers in Hong Kong) create and redeem units in bulk, which helps keep the market price close to the net asset value.
Investors trade units through a broker at the market price, paying brokerage and crossing the bid-ask spread on top of the fund's ongoing expenses. What a seller receives is the market price, not the NAV, so spreads, premiums and discounts matter most for thinly traded or complex ETFs.
Mutual Fund
Investors subscribe and redeem with the fund, often through a distributor, at a price based on the net asset value, which is usually calculated once per dealing day after markets close. An order placed during the day is normally processed at the next calculated NAV.
Funds may be actively managed to beat a benchmark or passively track an index. Costs include the expense ratio and sometimes sales or redemption charges, and they reduce returns whether performance is good or poor. Unlike ETF units, mutual fund units do not trade at changing prices on an exchange during the day.
Net Asset Value (NAV)
A fund values its holdings at closing or fair prices at set valuation times, adds cash and income, and deducts fees and accrued expenses. Mutual funds deal at NAV, whereas an ETF's exchange price moves all day and can sit at a premium or discount to NAV; an indicative intraday NAV is often published.
When a fund pays a distribution, NAV per unit falls by about that amount, so comparing two NAVs understates a distributing fund's return. Total-return figures add distributions back and usually assume they are reinvested, so check that assumption.
Worked example: A market price can differ from NAV
Illustrative: Fund A has HK$10 million of assets, HK$200,000 of liabilities and 1 million units, so NAV is HK$9.80 per unit. An exchange price of HK$9.90 is about 1.02% above that NAV. Timing differences and asset liquidity can matter; the quoted premium is not a guaranteed arbitrage available to every unit holder.
Check your understanding
Assets are HK$5.2 million, liabilities HK$200,000 and units 500,000. What is NAV per unit?
Show answer and explanation
(5.2 million − 0.2 million) ÷ 500,000 = HK$10. A dealing price can still differ because of the fund structure, valuation time and applicable transaction rules.