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Q&A: How Do ETF and Mutual Fund Share Prices Work?

The way these instruments are priced is totally different from stocks.

By: Ric Edelman

Question: I don’t know if this is true all of the time, but it seems that when I compare the share price of an ETF to the share price of a mutual fund of the same class — say, a large-cap fund — the ETF price is usually higher. Is that because of the underlying stocks that it owns?

Ric: No. Share prices for mutual funds and ETFs are actually irrelevant. For example, when a fund company brings a new fund to the marketplace, it literally invents the share price. It can be any number: $10 a share, $100 a share, $1,000 a share — that price is utterly irrelevant because all you’re doing is creating a basis, a starting point at which the trades will occur thereafter.

The company’s decision is strictly marketing: Would investors prefer to buy shares that are $10 each or $100 each? There is no difference, because buyers of $10 shares simply get 10 times as many shares as buyers of $100 shares. Don’t let the share price sway you when buying a mutual fund or ETF.

Note: This is different from stocks. Many so-called penny stocks (actually referencing any stock priced under $5) or “pink sheet” stocks (so-called because they don’t trade on any exchanges and traditionally had their prices listed on a document printed on pink paper) are highly speculative and sometimes even scams.

Aggressive brokers pitch penny stocks by claiming that your $10,000 investment can get you 200,000 shares of a stock priced at a nickel. If the price moves just a penny, your profit is $2,000! Or so the pitch goes.

In fact, the stock is unlikely to rise a penny anytime soon, if at all — because that’s a full 20% increase. Stay away from penny stocks.

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