The issue came into focus in September when some international ETFs, including the Motilal Oswal Nasdaq Q50 ETF, traded at substantial premiums to their indicative net asset value (iNAV). Several other India-listed international ETFs have also traded above their underlying value, although the size of the premium has varied.
For investors, this matters because buying an ETF at a steep premium can affect returns even if the underlying overseas market performs well. If the premium subsequently narrows, the ETF’s market price can fall even when the value of its underlying investments remains unchanged.
Investors therefore need to look at the exchange price alongside the NAV or iNAV, rather than just the index’s performance or the ETF’s recent returns.
Why are some international ETFs trading at a premium?
The premium is largely a demand-supply issue, according to Viram Shah, Founder and CEO, Vested, an online investment platform.
Indian mutual funds operate within an industry-wide overseas investment limit of $7 billion, with a separate $1 billion limit for overseas ETFs. When fund houses have limited room to create fresh ETF units but investor demand remains strong, the market price can move significantly above the actual value of the underlying portfolio, Shah said.
For instance, if the underlying assets of an ETF are worth ₹100 but the ETF is trading at ₹150, an investor buying at that price is paying a 50% premium. If the underlying value remains at ₹100 but the premium disappears, the ETF could fall towards ₹100 even without a fall in the underlying market.
“Investors should therefore separate the performance of the underlying index from the price at which they are buying the ETF,” Shah said.
The premium could normalise if the supply of ETF units improves, overseas investment limits open up further or demand at elevated prices cools, he added.
What should investors check before buying?
Investors should compare the ETF’s market price with its NAV or iNAV and also consider its liquidity, tracking difference and expense ratio.
A premium can materially change the return an investor earns. For example, even if the underlying index rises, the investor’s return could be lower if the premium contracts sharply during the same period.
Can investors buy overseas ETFs directly?
Direct investment in overseas-listed ETFs is another route available to Indian investors through the Liberalised Remittance Scheme (LRS), subject to applicable rules and limits.
One advantage is that the investor buys the overseas-listed ETF directly, rather than an India-listed ETF whose exchange price can be influenced by local demand and supply. It can also provide access to a wider range of ETFs across indices, sectors, markets and themes.
However, investors need to consider currency conversion, remittance charges, brokerage, taxation and currency movements. The ease of transferring money and availability of tax-related documentation can also be relevant.
Shah said investors should examine the regulatory and custody structure of the platform before investing.
“They should understand which entity is executing the investment, which regulator oversees it, where the securities and cash are held, and what investor protections apply,” he said.
What about UCITS ETFs?
UCITS ETFs are another route for investors looking for international exposure. These ETFs are widely available on European exchanges and can provide exposure to US, European, Japanese and global markets.
The ETF’s structure and domicile can be important considerations. Many UCITS ETFs are domiciled in Ireland, while some are available in accumulating versions, under which income is reinvested within the fund instead of being distributed to investors.
For Indian investors, factors such as domicile, dividend treatment, taxation, liquidity, tracking difference, expenses and currency exposure need to be considered before choosing a fund.
What about gold ETFs?
Gold ETFs offer another way for investors to gain exposure to gold without buying, storing or managing physical gold.
Chintan Haria, Principal – Investment Strategy, ICICI Prudential AMC, said gold’s role in an investor’s portfolio has moved beyond its traditional association with physical ownership and festive-season purchases.
“When markets become unpredictable, it’s a natural reminder to check our financial foundations. For generations of Indian investors, gold has been an important store of value, and the festive period from Navratri to Diwali always brings the asset class right back to the top of our minds,” Haria said.
He said gold can also act as a potential portfolio diversifier alongside equities and bonds.
“Gold ETFs offer a convenient way to gain exposure to the asset without the need to buy, store or manage physical gold,” Haria said.
Haria said the investment relevance of gold need not end with the festive season, with its allocation instead considered in the context of an investor’s overall portfolio objective, investment horizon and risk profile.