A: Thanks for the question.

Most ETFs are based off an ‘index’ (such as the S&P/ASX 200 or US S&P 500) and attempt to fully replicate the underlying components of the index. Accordingly, they have almost negligible tracking error.

Because they replicate in full and track the index so closely, the issuers of the ETF can appoint or arrange for “market makers” (brokers)  to make an active two-way market on the stock exchange in the ETF.  As the value of the underlying index changes during the day, the bid/offer prices on the ETF change. This process effectively becomes automated – so when you trade an ETF on the stock exchange, you are pretty well guaranteed that you are trading the ETF at a price that is within a fraction of a percent of its underlying value.

The ASX tracks this (effectively, the spread between the bid and the offer price) and publishes in its funds report (the most recent report, December 2013 is available here).

So, it is not really a question about the price of the ETF – it is a question about whether it is the right time to invest in that market or not.

If on the other hand you are considering LICs (Listed Investment Companies), this becomes a valid question because the price that the LIC is trading at in the secondary market can be “overpriced” or “underpriced” relative to its underlying value. Know as the “premium” or “discount” to Net Asset Value, these amounts in percentage terms can be material – often as high as 15%. These premiums or discounts arise due to supply/demand pressures and the fact that that the LIC is effectively a close ended structure with a finite number of shares on issue. While not always the case, discounts tend to occur more in “bear’ markets, and premiums in “bull” markets.

LICs are required by the ASX to report and publish their NTA at the end of every month. The ASX report noted above also covers LICs, and reports  on the premium/discount using end of month market prices.

Regards.