One Underrated Metric Investors Can Use to Get Insight Into an ETF

I'm sure it goes without saying, but there's no shortage of financial metrics for analyzing stocks. There may even be too many. You have metrics that can tell you if a stock is overvalued or undervalued, assess its profitability, track its volatility, and perform countless other financial analyses.

Of all these metrics, net asset value (NAV) remains underrated in its ability to give insight into stocks, especially exchange-traded funds (ETFs).

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Metrics for individual stocks may not apply to ETFs

When analyzing an individual stock, certain metrics are more straightforward because they pertain only to the specific company you're looking at. Since ETFs contain multiple stocks (sometimes thousands), those same metrics may not be as relevant or easily applied.

For example, the price-to-earnings (P/E) ratio is a good metric for analyzing an individual stock, but using it to look at an ETF would be difficult because ETFs can contain a diverse range of companies, each with its own P/E ratio, making a single P/E ratio less meaningful unless you're comparing it to its own history. The same can also be said for a metric like earnings per share because the ETF aggregates the earnings of its holdings.

That's why a metric like NAV -- which tells you an ETF's per-share market value -- is a good starting point.

How to calculate net asset value

You need three numbers to calculate an ETF's NAV: its total assets, total liabilities, and number of outstanding shares. Once you know those, you can plug them into the following formula:

• (Total assets − Total liabilities) / Number of outstanding shares

An ETF's NAV tells you its per-share intrinsic value, but the number itself doesn't tell you much until you compare it to the ETF's trading price. By comparing an ETF's trading price with its NAV, investors can see if the fund is trading at a premium (above NAV) or a discount (below NAV).

As an example, here are two popular small-cap ETFs that show a very modest premium and discount to their NAV, respectively:

IWM Net Asset Value data by YCharts

As you can see, with the most popular ETFs, you'll often see premiums or discounts of just a few pennies.

If you want to calculate a company's NAV yourself, you can find its total assets and liabilities on its balance sheet, and its outstanding shares can typically be found on its quarterly report. Several financial websites offer more up-to-date assessments of NAV.

The limitations of using NAV for assessing an ETF

While NAV can be a good metric for evaluating the intrinsic per-share value of an ETF, it does have its limitations. To begin, NAV can only give a snapshot at a specific time, which may not always reflect the real-time market fluctuations that ETFs often experience.