Premiums and discounts in international ETFs

The Indian mutual fund industry has a $7 billion limit for overseas investments. Around Jan-Feb of this year, mutual funds started hitting that limit. So pretty much all the international mutual funds have stopped fresh inflows. International ETFs had to suspend fresh creations and redemptions, and this is where the problem lies.

In simple terms, an ETF is like a mutual fund that trades on the exchange. Meaning, that it will have an NAV like a mutual fund, which is the fair value of all the underlying assets. An ETF also has a price which is determined by demand and supply on the exchanges. So, ETFs can trade at a premium or discount to their fair value, which is measured by NAV or intraday NAV (iNAV). Unlike a mutual fund, ETFs also appoint market makers and authorized participants. Their job is to provide liquidity and also to ensure that the ETF price is not too far away from its fair value.

Now, let’s look at a live example. The current price of Motilal Oswal Nasdaq 100 ETF is around 99, but the intraday NAV or iNAV is about 87. Meaning, Motilal Oswal Nasdaq 100 ETF is trading at a premium of 12%.

Now, typically, the market makers will buy all the underlying shares of the Nasdaq 100 index and deliver them to Motilal Oswal AMC. Motilal takes the shares and creates units for the market maker. The market maker would then go and sell the units on the exchange at the current price, and the difference minus his costs will be the profit. Similarly, if the ETF is trading at a discount, the process will the opposite. This creation and redemption mechanism keeps the ETF prices in line with their NAV.

But the problem is, since the AMCs are hitting the limit set by RBI, creations and redemptions have been suspended in international ETF. So only the existing units that were already created are trading on the exchanges. Without active market-making (creations/redemptions) international ETF prices are trading at premiums and discounts.

So, if you are buying or selling international ETFs, please ensure that you are checking the iNAV on the AMC websites. The other important thing is, the iNAVs shown on the AMC websites may be incorrect because the website might be down😅 I know, this is the reality and I hope it changes. But anyways, don’t just blindly buy these ETFs because international markets are falling.

We’ve also added a nudge on Kite

We also have a detailed chapter on ETFs on Varsity if you help you understand how ETFs work.

What are the alternatives?

There are some international mutual funds which are still accepting inflows.

  1. DSP Global Innovation Fund of Fund. This fund was supposed to invest in multiple international ETFs but is currently only investing in Nasdaq 100 ETF. It will invest in the other ETFs, once the restrictions are revised. So this is not a pure Nasdaq fund. Check the presentation for more.

  2. Kotak NASDAQ 100 Fund of Fund

  3. Navi US Total Stock Market Fund of Fund
    **Please check the scheme details and see if they fit your investment objective. Invest only if it does. Don’t just invest haphazardly. **

Where to check the iNAVs?

https://www.mostshares.com

https://www.miraeassetmf.co.in/transact-in-etf

6 Likes

I used Morningstar website to track NAV, not sure whether it’s “iNAV” but morningstar is great giving close to “iNAV” results in MAFANG ETF. Only Drawback is , Morningstar NAV is updating at EOD.

But it gives fair idea about “inav” of any etf based on previous day “nav”.

In Mirae Website, I don’t see Mafang “inav”, pls let me know if it’s there in Mirae AMC site.

This paper is good information for investors who wish to buy units in ETF as they are made aware of the regulatory constrains. The situation is ok for the existing investors as the same is trading at a premium and not at a discount (motilal nasdaq). Hence it is win win to both.

Think of a situation where due to relulatory constrains, if the market price is lower than iNAV and the investor needs to redeem. This would have been bad.

@Bhuvan SEBI is doing nonsense in banned the international investment , now i try to buy these international etf and fund , how can we average it ,

before itself i am doing SIP in these etf, now suddenly you banned how can i average it , now the valuation are comfort for me , otherwise i can buy through vested - i think this door is opened
SEBI is always useless

This time its not SEBI but RBI I think. Thanks to their limits on LRS

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HI - is there any change in this limit or regulation yet? The nudge is still showing for MO Nasdaq 100 ETF, so I guess there is still no market maker for these ETFs?

1 Like