Measure
Fair value level
Definition
How much of a fund's portfolio is priced by an observed market trade, and how much is an estimate.
Formula
Level n share = Σ wᵢ over holdings classified Level n (wᵢ = weight of holding i)
How to read it
Level 1 is a quoted price for the identical asset in an active market. Level 2 is derived from something observable but not the asset's own live price — a comparable trade, a yield curve, or the local close adjusted for the hours since it. Level 3 is a model. A US large-cap index fund is close to 100% Level 1; an international equity fund is usually the reverse, because its markets are shut while the ETF trades.
What it does not tell you
A low Level 1 share is not a warning by itself, and reading it as one is the common mistake. Bonds trade over the counter and are Level 2 almost by definition, and international equity is Level 2 because of a fair value adjustment that exists to stop stale prices being arbitraged — both are normal and disclosed. What the number tells you is what kind of price you are buying at, which is why premium and discount to NAV behave differently for these funds. It says nothing about whether a holding could actually be sold at that price.
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