An index is a calculation over a named basket: Investor.gov's market indices entry puts 30 blue chip US company stocks in the Dow Jones Industrial Average and most publicly traded US stocks in the Wilshire 5000 Index. An exchange-traded fund is a registered investment company holding actual securities, and the SEC's updated ETF bulletin of 23 February 2023 states that it must calculate a net asset value per share every business day. The condition that separates the two numbers is trading: the index has one value, while the fund has a NAV and a market price that sits above it at a premium or below it at a discount.

An ETF is a fund registered under the 1940 Act

The ETF bulletin covers ETFs registered as open-end investment companies or unit investment trusts under the Investment Company Act of 1940, and sets out the plumbing. Retail buyers only transact in the market. Shares are created and redeemed by Authorized Participants, typically large broker-dealers, in blocks the bulletin calls creation units, at a size it gives as 50,000 ETF shares, usually paid for in kind with a basket of securities that mirrors the portfolio.

NAV per share is the value of all assets minus all liabilities divided by the number of shares. Three layers carry three different numbers, and keeping them apart is what stops an index return from being read as a shareholder's result.

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LayerWhat it isWhere its number comes from
IndexA calculation over a named basketThe index methodology and its observation dates
Fund objectiveWhat the adviser seeks to achieveThe prospectus, filed on EDGAR
ETF shareAn exchange-traded claim on the portfolioNAV per business day and the market price

The market price and the NAV are two different numbers

An ETF's market price moves during the trading day with the prices of its holdings and with demand for the fund, so it typically lands above or below the end-of-day NAV per share. Authorized Participants can trade with the fund at NAV as well as on the market, and the bulletin describes that arbitrage as what pulls the market price back toward NAV. Premiums and discounts for a specific ETF vary over time, and the fund publishes its own history of them.

Example: a 50-cent spread costs $100 on 200 shares

The ETF bulletin works this one with its own figures. An ETF share trades at $59.50 bid and $60.00 ask, so the spread is 50 cents. Buy 200 shares at the $60.00 ask and the outlay is $12,000. Sell those 200 shares immediately at the $59.50 bid and the proceeds are $11,900. The difference is $100, or 0.83 percent of the $12,000, and no commission has been charged yet.

The spread is a cost of entering and leaving, not a line on a statement. It widens as trading volume thins. The same bid and ask fields on a single stock are read the same way in what a stock quote tells you.

Rule 6c-11 puts the fund's own numbers on its website

The SEC adopted Rule 6c-11 on 26 September 2019, which requires daily portfolio transparency on an ETF's website together with historical premium and discount information and bid-ask spread data. The rule took effect 60 days after publication in the Federal Register, with a one-year transition for the related form amendments and rescission of the older exemptive orders one year after the effective date.

That is why the previous business day's NAV, closing market price, closing premium or discount, median bid-ask spread and portfolio holdings are all findable on the sponsor's page. Those are the figures a return comparison needs, and comparing market moves on the same basis sets out how to line them up.

A ticker does not prove an index is involved

The ETF bulletin separates index-based ETFs, where the adviser seeks to track an underlying securities index and achieve returns closely corresponding to it, from actively managed ETFs, where the adviser buys and sells components without regard to conformity with an index. Both trade on national stock exchanges. Both have tickers.

The prospectus states which one a fund is, along with its objective, strategies, risks, costs and any historical performance. A stated objective can also name a period shorter than the holding period, which is the mechanism behind daily reset ETFs.

Source references

Primary sources used for this guide. Follow the links for the original scope, definitions and conditions.