Investing term

What is Premium/discount?

How far an ETF's trading price is above (premium) or below (discount) its net asset value.

Premium/discount measures how far an ETF's trading price sits above (premium) or below (discount) the value of its underlying holdings (NAV). For big, liquid ETFs it's tiny, thanks to the creation/redemption mechanism. But in stressed markets or for thinly traded ETFs it can widen — meaning you might pay a bit more, or sell for a bit less, than the holdings are truly worth.

For example

In a market panic a bond ETF trades at a 2% discount to NAV — sell then and you get less than the underlying bonds are actually worth.

Premium/discount is taught hands-on in Stage 6 — Index Funds, ETFs & Mutual Funds.

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Related terms

Active fundA fund whose manager picks stocks in the hope of beating a benchmark.BenchmarkThe reference index a fund compares itself to — e.g. the S&P 500, MSCI World, or Bloomberg Aggregate.Creation/redemptionThe mechanism that keeps ETF prices close to NAV. Authorized participants swap baskets of underlying stocks for ETF shares (or vice versa).DistributionThe income a fund pays out to its shareholders — dividends from stocks held, plus realized capital gains.
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