ETFs: ETFs that track major global indices can cost more

Mumbai: Buying Mumbai-listed exchange-traded funds (ETFs) that track the movements of some key global indices could be a risky proposition at this point. Some of these ETFs are trading at a premium to their net asset value (NAV) on exchanges as mutual funds’ inability to generate new units due to regulatory restrictions has distorted prices.

Various ETFs are trading within a range of 1% to 18% above their values. For example, Motilal Oswal Nasdaq 100 ETF, a popular program with assets of 6,130 crore, and Nippon India ETF Hang Sang BeES with assets of 88 crore are trading between 5% and 18% above their NAVs.

“We have stopped market making. There is no new creation of units, due to regulatory restrictions,” said Pratik Oswal, head of passive fund business at Motilal Oswal AMC. “There is a premium because prices depend on pure demand and supply.”

Mutual funds had stopped accepting new money into international funds from Feb. 2 as the industry was close to the $7 billion limit to invest in foreign securities.

There are no restrictions on the purchase of ETFs for investors as they trade on the exchange. Fund houses, however, cannot create new units because they are not allowed to invest in overseas securities. As the demand for international funds continues and in the absence of fresh supply, there is a shortage which drives up the prices quoted on exchanges. The spreads will narrow once the Reserve Bank of India raises overseas investment limits.

Investment advisors have said that buying at a premium to NAV will reduce returns when NAV and market prices converge.

“Investors should be very careful and ensure that they only buy ETFs close to net asset value,” said Harshvardhan Roongta, CFP, Roongta Securities. “If they have any SIPs set up in such funds, they should shut them down and only come back when normalcy returns.”

Among other international ETFs, Mirae Hang Sang Tech ETF, Mirae NYSE Fang+ ETF, and Mirae S&P500 Top 50 ETF are trading at premiums of 1% to 2%.

ETFs, which are passively managed products, are bought and sold by stock market investors. Mutual funds often appoint market makers, who provide two-way liquidity to investors trading in these ETFs, eliminating price anomalies. Large investors often approach the fund house separately for the creation of units.

Since early April, Motilal Oswal’s Nasdaq 100 ETF has been trading at a 4-8% premium to its net asset value. Hang Sang BeES, managed by Nippon Life India AMC, traded at an 11%-19% premium to its net asset value over the same period.

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