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Understand how ETF prices move throughout the day, the difference between NAV and iNAV, and why tracking error matters when choosing an ETF.
Unlike a mutual fund, which has just one price a day, an ETF's price moves continuously during market hours — just like a stock. This can feel confusing at first: which price is the "real" one, and why might it differ from what the underlying holdings are actually worth? Understanding NAV, iNAV, and tracking error clears this up.
Net Asset Value (NAV) is the true, official value of one ETF unit, calculated by the AMC at the end of each trading day. It's based on the closing prices of all the securities the ETF holds, divided by the total number of units outstanding. This is the same NAV concept used for mutual funds.
Indicative NAV (iNAV) is a real-time, continuously updated estimate of the ETF's fair value, calculated throughout the trading day based on the live prices of the underlying securities. Exchanges typically publish iNAV every 15 seconds during market hours, giving traders a live benchmark to compare against the ETF's actual traded price.
An ETF's actual traded price on the exchange is determined by buyers and sellers, not directly by iNAV. In a liquid, well-arbitraged ETF, the market price usually stays very close to iNAV. But gaps can appear when:
As a rule, it's worth checking the ETF's iNAV (where available on your broker's app) against the price you're about to pay, especially for less-liquid ETFs.
Tracking error measures how closely an ETF's actual returns follow its underlying index's returns over time. Even though an ETF is designed to mirror an index, small differences arise due to expense ratios, cash drag, rebalancing costs, and imperfect replication. A lower tracking error means the ETF is doing a better job of delivering the index's actual performance.
| Cause | Explanation |
|---|---|
| Expense ratio | Fund management costs are deducted from returns, creating a small permanent gap |
| Cash drag | Fund holds a small cash buffer for redemptions, which doesn't grow in line with the index |
| Rebalancing lag | Time delay between an index change and the fund adjusting its holdings |
| Dividend/interest timing | Delay between receiving dividends and reinvesting them can create small mismatches |
These two terms are often used loosely but mean slightly different things. Tracking difference is the simple gap between the ETF's total return and the index's total return over a period. Tracking error is a statistical measure (standard deviation) of how much that gap fluctuates over time. A consistently small tracking difference with low tracking error generally indicates a well-managed ETF.
Most fund houses publish tracking error and tracking difference figures in the ETF's factsheet, usually updated monthly. It's worth comparing this figure across a few ETFs tracking the same index before choosing one, since even index-tracking funds aren't identical in execution quality.
1. Ignoring iNAV and paying a large premium over fair value. This is more likely in low-liquidity ETFs during volatile sessions.
2. Assuming all ETFs tracking the same index perform identically. Tracking error can vary meaningfully between fund houses.
3. Confusing a low expense ratio with a low tracking error. They're related but not the same — always check both.
4. Trading during the first or last few minutes of the market. Prices can be more volatile and less aligned with iNAV during these windows.
Key Takeaway: An ETF's market price can briefly diverge from its true value (NAV/iNAV), and tracking error shows how well it delivers the index's actual performance over time — both are worth checking before you invest. The next lesson covers Index Funds vs ETFs: Which One Should You Pick? in the Choosing ETFs module.
NAV is calculated once a day at market close, while iNAV is a continuously updated estimate of fair value published throughout the trading day.
Market price is set by live buying and selling on the exchange, which can temporarily diverge from fair value during low liquidity or fast-moving markets.
Lower is better, and it's most useful to compare tracking error across ETFs tracking the same index rather than judging it in isolation.
Fund houses typically publish this in the ETF's monthly factsheet, available on their website.
Not necessarily — expense ratio is one contributor to tracking error, but factors like cash drag and rebalancing lag also play a role.
Disclaimer: This article is for general educational purposes only and does not constitute personalized financial, investment, tax, or legal advice. Figures, rates, and rules mentioned may change over time — verify current details with an official source or a qualified professional before making financial decisions.