Indian Investors Face 20% Premium on US ETFs Amid Surging Demand and Limited Liquidity: Here’s Why?

Investors in India are encountering a considerable premium on US equity exchange-traded funds (ETFs), with some trading at 18-20% above their net asset values (NAV). This phenomenon is primarily driven by intense demand and limited liquidity. 

Reasons Behind Steep Premium on US ETFs 

US equity ETFs like the Motilal Oswal Nasdaq 100 ETF and the Mirae Asset NYSE FANG+ ETF are trading at a substantial premium compared to their NAV.  

The Motilal Oswal NASDAQ 100 ETF, for instance, is trading at ₹289.77, nearly 20% higher than its NAV of ₹241.48.  

This discrepancy is largely due to constrained supply and persistent demand from Indian investors seeking exposure to US markets, especially technology-linked products. 

ETFs are designed to trade close to their NAV, aided by arbitrage mechanisms that align market price and underlying value. However, current restrictions on new unit creations and operational hurdles for market makers have led to mismatches in supply and demand, driving prices up. 

Challenges for Investors Due to Pricing Distortions 

Purchasing ETFs at a premium can impact future returns. For instance, if an ETF's NAV is ₹100 but trades at ₹120, investors effectively pay a 20% premium.  

This overpayment may reduce returns, especially if the ETF's premium shrinks later. Monitoring market price, latest NAV, and indicative NAV (iNAV) during trading hours can help investors make well-informed decisions. 

Market Conditions and Investment Considerations 

Indian investors looking to secure US market exposure must consider the impact of premiums on investment returns.  

Evaluating bid-ask spreads, liquidity trends, and seeking broader market insights can aid in identifying whether current premiums are temporary or indicative of a longer-term trend. 

Read More: SEBI Bars Family Trusts from Sponsoring Mutual Funds; Capital Structuring Remains Unclear! 

Conclusion 

The current premium on US ETFs poses a challenge for Indian investors eager to diversify portfolios. It underscores the importance of evaluating market conditions and understanding the implications of such disparities on investment gains. 

Disclaimer: This blog has been written exclusively for educational purposes. The securities or companies mentioned are only examples and not recommendations. This does not constitute a personal recommendation or investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.