ETFs trade like small-cap stocks as SEBI bans MFs’ overseas investment 

The overseas-focused exchange traded funds (ETFs) on stock exchanges are trading at a premium over the indicative net asset value (iNAV) announced by mutual funds due to soaring investors amid the SEBI diktat.

• Also read: Why exchange traded currency derivatives volumes slowed in 2023

Last month, SEBI directed AMFI to stop fund houses from accepting fresh inflows into ETFs investing in overseas ETFs from April 1. The direction was on the back of strong inflows taking overseas ETFs close to the mandated investment limit of $1 billion.

On Friday, Mirae Asset NYSE FANG+ ETF closed at a premium at ₹95 on the BSE against the iNAV of ₹79. Similarly, Nippon India ETF Hang Seng BeES was traded at ₹267 against iNAV of ₹255.

Motilal Oswal Nasdaq Q 50 ETF and Motilal Oswal Nasdaq 100 ETF were traded at marginal premium of ₹62 and ₹144 against iNAV of ₹59 and ₹142, respectively.

Illiquid small-caps

Usually, mutual funds generate units based on market makers’ investment to ensure that the deviation in stock market price of ETFs and iNAV are bare minimal. However, with SEBI stopping overseas investment, mutual funds are not able to create fresh units and the market maker leg in the entire operation is completely cut off. The iNAV announced by mutual funds are based on the investments already made in overseas ETFs and stocks.

With this, most of the overseas ETFs are traded like an illiquid small-cap stock and prices shoot up depending on demand and supply, said an executive of a mutual fund house.

Since SEBI has also stopped fresh investment in MF schemes investing directly in global markets, there is a big demand for ETFs traded on the exchange. MF schemes investing directly in overseas markets have a limit of $7 billion.

Limits exhausted

Arun Sundaresan, Head – ETF, Nippon Life India Asset Management, said foreign investments are currently not allowed in MFs as the industry has exhausted overall investment limits.

Hence, the demand supply on the exchange for a particular foreign ETF is driving the premium and discount, which may be different from the iNAV of the fund, he added.

Pratik Oswal, Head of Passive Funds, Motilal Oswal AMC, said Motilal Oswal Nasdaq 100 ETF & FoF and S&P500 Index Fund continue to invest internationally and supply fresh units daily, as the fund house has headroom available for international securities investments within regulatory limits.

Zerodha, one of the largest stock broking firms, said several ETFs investing in international securities are trading at a premium compared with their iNAV because of restrictions on international investments by MFs.

“iNAV is the fair value of ETF’s holdings. When buying and selling ETFs on the exchange, investors should ensure that the traded price is as close to iNAV as possible,” it said.