During market downturns, Exchange Traded Funds (ETFs) often draw more attention from investors and traders looking for opportunities. Yet, buying ETFs at the right price can be tricky.
A frequent mistake is not paying enough attention to the difference between an ETF’s trading price and its indicative net asset value (iNAV). The iNAV represents the real-time value of the securities within the ETF. Due to factors like demand, supply, and liquidity, an ETF can end up trading either higher or lower than this value.
Understanding iNAV is very important for any investor. It helps you determine whether you’re getting a fair price on your ETF purchases or if you might be overpaying, a risk that’s particularly high during volatile market periods.
In our latest video, Aastha highlights common mistakes to avoid while investing in ETFs and explains the significance of iNAV with a simple example. Do give it a watch:
We also have a detailed chapter on ETFs on Varsity, authored by @Bhuvan
Further, you can view the iNAV of an ETF on Kite, simply search for ‘iNAV’ in the market watch and click on ‘Add’. Here’s how:
When will market makers close the arbitrage in ETFs like Motilal Oswal Nasdaq 100 ETF?
Is there a way for retail investors to take advantage of this arbitrage in any way?
Perhaps, the best example of this would be the Motilal Oswal NASDAQ 100 (N100). During 2017-2018, the ETF was trading at a huge premium to the NAV. The premiums were as high as 20%+. This was probably because the market makers weren’t active in providing liquidity. Value Research allows you to compare the NAV and price, here’s a chart, notice the huge difference between the NAV and the price.
Someone could have taken advantage of this premium by going to Motilal AMC and asking them to create units, which happens at the NAV and sell them at the market price on the exchange. The difference would’ve been the profit.
This premium persisted for a long time. Then Motilal, If I’m not wrong, appointed new market makers and launched a fund of fund (FOF) for the ETF, which corrected the premium. So the market maker around 2018 would have created Motilal units at the NAV and sold them on the exchange at the market price and corrected the premium.
