The benchmark index ETFs that have dominated and continue to dominate the ETF market in terms of trading volume were originally developed to provide something to trade on the Toronto Stock Exchange in Canada and the American Stock Exchange in the United States. These ETFs were based on popular benchmark indexes that had a variety of traded instruments (such as futures and options) available for use in hedging the trading of shares in the ETFs and for a variety of other purposes. The original mantra for the SPDR was "trades just like a stock".
The creators of the original ETFs developed a better fund structure for many purposes than the existing mutual fund structure but the absence of ability to measure the cost of intraday trading and the requirement for fully transparent portfolios do not meet all the needs of most serious investors.
Intraday trade pricing is not necessary if a mechanism exists to assure that the shares of an ETF trade at a close relationship to the fund's daily net asset value. NAV-based trading was developed to provide such a mechanism. Most of the trading that occurs in the most popular benchmark index ETFs is done for risk management applications by securities industry professionals. These professionals will also use NAV-based trading, but its principal purpose is to provide a trading mechanism that permits a wide range of investors and their advisors to trade at a price with a known relationship to the net asset value of the underlying portfolio. NAV-based trading is also essential for ETFs that do not have totally transparent portfolios to trade at a price close to their net asset value without compromising the integrity of the fund's investment process.
2. Where can I learn more about NAV-based trading?
Search engines will usually be the best source for the most current information, but listed below are a number of links to sites and publications that offer useful information on NAV- based trading, beginning with the original filing with the SEC and the SEC exemptive order: