Explained: Why US ETFs listed in India are trading at steep 65% premiums over the iNAV. Should you worry?

India-listed global ETFs are witnessing an unusual surge in prices, with some trading at premiums of as much as 65% over their indicative net asset value (iNAV). The sharp divergence has left retail investors seeking overseas exposure wondering what is driving the move, especially since there has been major movement in the underlying assets.

The first major divergence was seen on September 8, after US markets were closed on September 7 for the Labour Day holiday. The trend appears to have continued.

On Thursday, the Nasdaq 100 Top 50 ETF was trading at a 65% premium, while the S&P 500 Top 50 ETF was at a 55% premium. The NYSE FANG+ ETF was trading at a 37% premium, the Hang Seng Tech ETF at 26%, and the Nasdaq 100 ETF at 27%.

“Be very careful when you are trying to do passive investing in global markets from India, you may end up losing up to 50% on day 1, Let me explain,” Kirttan Shah, founder of Truvanta Wealth, wrote in a LinkedIn post.

So, has global investing suddenly become 27-65% more expensive? Not exactly.

The underlying overseas stocks have not suddenly become 65% more valuable. The sharp divergence appears to be largely the result of demand and supply constraints in India, along with changes affecting ETF price bands.

Why the sharp divergence?

SAMCO Securities said India’s mutual fund industry has been constrained by overseas investment limits. With limited ability to create additional units, the supply of these ETFs cannot respond normally when investor demand rises. That has created a situation where demand for these ETFs is running ahead of the available supply.

“But when the gap reaches 65%, it is no longer just a valuation curiosity. It raises a much bigger question for investors… Global diversification makes sense. Paying a 65% premium for it doesn't. Go global. Pay for the asset, not the premium,” it added.

Some mutual fund industry officials have also attributed part of the recent rally to a change in the methodology used to calculate circuit limits, introduced by Sebi.

The Economic Times had earlier reported that an industry executive, who declined to be identified, attributed the jump in global ETF prices over the previous two days to this change. “The reason we have seen a jump in global ETF prices over the last two days is a change in the methodology used to calculate their upper and lower circuit limits,” the executive said.

“Earlier, these ETFs were subject to circuit limits of plus or minus 20% relative to their
NAVs. Now, the circuit limits are calculated based on the T-1 closing price, bringing them in line with domestic ETFs,” the executive added.

“As a result, the circuit limits have been pushed further away, which could lead to a sharper divergence between the iNAV and market prices of these ETFs, as the price caps have shifted higher.”

There is another factor at play. Investor appetite for US funds has remained strong, with these funds having performed better than Indian equities.

At the same time, the mutual fund industry has already exhausted the $1 billion limit for investments in overseas ETFs. This has meant fund houses have not been able to create fresh units, leaving demand for US equity exposure higher than the available supply.

What does it mean for investors?

The key issue for investors is that the premium is over and above the value of the underlying assets. An ETF trading at a premium to NAV means investors are paying more on the stock exchange than the indicative value of the underlying portfolio.

For example, if an ETF’s underlying assets are worth Rs 100 per unit, but its market price is Rs 165, an investor buying at Rs 165 is paying a Rs 65 premium.

Kirttan cautioned investors to always check the iNAV before buying an ETF from the exchange. If the premium disappears for whatever reason, the entire premium paid by the investor can become a loss even if the underlying stocks themselves have not fallen.

Small premiums are a normal feature of ETFs, but unusually high premiums can erode returns if they eventually narrow. Investors should therefore compare the market price with the iNAV, assess trading liquidity and bid-ask spreads, and avoid placing market orders in thinly traded ETFs.

(This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here)