ETF Mechanics

For ETFs, the expense ratio is the annual fee charged to cover the costs of managing and operating the fund, represented as a percentage of the fund’s assets. This fee typically includes management fees, administrative costs, and other operating expenses. Actively managed ETFs generally have higher expense ratios because they require more hands-on decision-making from portfolio managers, while passively managed ETFs, which track indexes, tend to have lower expense ratios.

The Management Expense Ratio (MER) and the Management Fee are both costs associated with investing in a fund, but they cover different aspects of expenses:

• Management Fee: This is the fee paid to the fund's manager for overseeing and making investment decisions on the fund. It covers the compensation for the management team and their expertise in actively managing or monitoring the fund. It’s typically a core part of the overall cost but doesn’t account for all expenses.
• Management Expense Ratio (MER): The MER is a more comprehensive measure of a fund’s costs and includes the management fee plus other expenses, such as administrative fees, legal fees, accounting fees, and other operational costs. The MER represents the total cost to the investor and is expressed as a percentage of the fund’s assets.

In short, the management fee is a component of the MER, and the MER provides a fuller picture of the fund's annual expenses that affect the investor’s returns.

Both the Management Fee and Management Expense Ratio (MER) are backward-facing, as they can only be published after the fund's fiscal year has ended. This means investors see the actual costs only after they’ve been incurred. However, an interim MER figure may sometimes be posted mid-year, giving a preliminary insight into the fund’s expenses for that period.

The bid-ask spread for ETFs (Exchange-Traded Funds) is the difference between the bid price (the highest price a buyer is willing to pay for an ETF) and the ask price (the lowest price a seller is willing to accept). This spread reflects the liquidity and trading costs of the ETF:

• Narrow Spread: A narrow spread means there's high liquidity, and the ETF trades frequently with more buyers and sellers actively participating. This is common for popular, highly traded ETFs.
• Wider Spread: A wider spread indicates lower liquidity, where fewer transactions occur, making it harder to match buyers and sellers. This can be typical for more specialized or niche ETFs.

The bid-ask spread acts as an implicit cost to investors, similar to fees, as you often pay slightly more than the market value when buying (ask price) and sell for slightly less (bid price).

For most investors, however, the spread is negligible on highly traded stocks, such as those that make up a portfolio of typical Harvest ETFs, as these ETFs tend to include large, well-established companies with high liquidity and narrow spreads. This means that the spread’s impact on costs is usually minimal in these cases.

The Net Asset Value (NAV) of an ETF is calculated by adding up the value of all the assets an ETF holds, subtracting all liabilities, and dividing that number by the total number of units of that ETF currently outstanding.

A simple example: An ETF holds a portfolio worth $10,000, has liabilities totalling $1,000, and has 1,000 units trading. Its NAV would be calculated as ($10,000-$1,000)/1,000 which equals = $9.00.

Because ETFs trade on open markets, they also have a market price: the price at which ETF units can be bought or sold during trading hours. Sometimes the NAV and Market Price of an ETF can differ slightly during the trading day. When the NAV is calculated at the end of the day, however, the Market Price and NAV are reasonably close. You can see recorded daily NAV and Market (close) of Harvest ETFs here.

The management fees and operating expenses of an ETF are calculated daily as a liability and subtracted from the value of an ETF’s assets when the Net Asset Value (NAV) is calculated. Therefore the NAV of an ETF incorporates the management fee and operating expenses.

To calculate the monthly cash income you’ll receive from an ETF, you’ll need a few key pieces of information:

• Distribution Yield: The percentage yield the ETF pays annually, based on the current price or NAV.
• Number of Shares You Own: The total number of ETF shares you hold.
• Current Share Price (optional): The price per share of the ETF, which can help in some calculations to confirm accuracy.

Steps to Calculate Monthly Income:

1. Find the Annual Distribution per Share:

• Look up the distribution yield for the ETF (often provided on the ETF's fact sheet or website).
• Multiply the distribution yield by the current share price to get the annual distribution per share.
  (Annual Distribution per Share = Distribution × Share Price)
• For example, if the ETF has a 6% yield and the share price is $100:
  (Annual Distribution per Share = 0.06 × 100=6 dollars per share annually)

2. Calculate Monthly Distribution per Share:

• Divide the annual distribution by 12 to get the monthly distribution per share.
  (Monthly Distribution per Share = Annual Distribution per Share ÷ 12)
• For example: Monthly Distribution per Share = 6 ÷ 12 = $0.50 per share monthly

Calculate Your Total Monthly Income:

• Multiply the monthly distribution per share by the number of shares you own.
  (Monthly Income = Monthly Distribution per Share × Number of Shares)
• Example: If you own 100 shares:
  (Monthly Income = $0.50 × 100 = $50 monthly

Important Notes

• The actual income may vary if the ETF doesn’t distribute at a fixed rate every month.
• Some ETFs adjust distributions based on income from their holdings, so confirm the distribution consistency, especially for income-focused ETFs like those offered by Harvest ETFs.

Market Price and Net Asset Value (NAV) are two important values for ETFs, and understanding their difference can be useful for investors:

1. Market Price:

• This is the price at which an ETF is bought and sold on the stock exchange during market hours.
• It fluctuates throughout the day based on supply and demand, similar to any publicly traded stock.
• The market price may trade at a premium (above) or a discount (below) the NAV, depending on investor sentiment, demand, and other market factors.

2. Net Asset Value (NAV):

• NAV is the per-share value of the ETF's underlying assets (stocks, bonds, or other securities).
• It is calculated by taking the total value of the ETF’s assets, subtracting liabilities, and dividing by the total number of shares outstanding.
• NAV is generally calculated once at the end of each trading day.

3. Market Price vs. NAV:

• The market price can differ from the NAV due to supply and demand factors, and the difference between them is known as the premium or discount.
  • If the ETF trades above its NAV, it’s said to be at a premium.
  • If it trades below its NAV, it’s at a discount.
• This difference is usually minimal for ETFs with high liquidity or those tracking popular indexes but can be more significant in niche or less liquid ETFs.

For Harvest ETFs, like many others, the market price and NAV are typically close, though variations may occur based on market conditions and investor demand.

A premium or discount to NAV refers to the difference between an ETF's market price and its Net Asset Value (NAV):

1. Net Asset Value (NAV): This is the per-share value of the ETF’s underlying assets, calculated by dividing the total value of the assets (minus liabilities) by the total shares outstanding. NAV is generally updated once daily, after the market closes.
2. Premium: An ETF is trading at a premium when its market price is higher than its NAV.

• This means investors are willing to pay more than the actual value of the underlying assets, often due to strong demand or positive investor sentiment.
• Example: If an ETF’s NAV is $50, but it trades at $52, it’s trading at a 4% premium.

1. Discount: An ETF is trading at a discount when its market price is lower than its NAV.

• This indicates that investors are paying less than the actual value of the underlying assets, which can occur if there’s low demand or negative sentiment.
• Example: If an ETF’s NAV is $50, but it trades at $48, it’s trading at a 4% discount.

Calculating Premium or Discount Percentage

To calculate how much of a premium or discount the ETF is trading at relative to NAV:

• Premium/Discount % = (Market Price – NAV) ÷ NAV × 100
• A positive result indicates a premium.
• A negative result indicates a discount.

Why It Matters

The premium or discount can affect buying and selling decisions, as it reflects how the market values the ETF relative to its assets. For ETFs that hold liquid, highly traded assets, the premium or discount is typically small. However, for ETFs with less liquid or niche assets, premiums or discounts can be larger.