The hidden cost of buying global ETFs in India, and how to avoid it

In ETF parlance, there is an NAV, the last day’s value as published by the fund house, as well as an iNAV (during trading hours). And then there is a market price.

Take an example. If the NAV of a fund is Rs 100, the market price of the ETF could be Rs 130, on any given day. For an investor buying such a fund, this translates into a premium of 30%. This premium could rise even further.

Why do Indian global ETFs trade at a premium to NAV? The reason is primarily regulatory. Two SEBI rules have impacted their pricing structure.

What if the premium disappears?

Now comes the more damaging part. What if the premium disappears? It may crash overnight, with the ETF hitting the lower circuit for 2 to 3 days in a row. That means the market price may fall 20% a day, pulling the price down to nearly half in just three days of trading. The result is painful. Investors holding units bought at a higher price may get stuck.

There is another problem. You are not only buying units at a premium. You are also holding a price that has drifted away from the performance of the underlying benchmark that the ETF tracks.

Therefore, one needs to be cautious while buying global ETFs. Try to buy those whose market price is closer to their NAV.

Is there a cheaper way in?

If you are still uncomfortable with buying at a premium, there are alternatives. Global ETFs are also available with international brokerage firms.

There are international ETFs that track the S&P 500, Dow-30 and the Nasdaq-100 indices. It can still make sense for an investor to include Nasdaq exposure in a globally diversified portfolio. However, buying at a premium of 50%, 100%, or 200% does not increase your exposure to the Nasdaq. It simply indicates that you are paying significantly more for the same underlying assets.

“The same exposure is available without a premium. US-listed ETFs can be bought directly through the LRS route, and they trade at or very close to their NAV because units can be created and redeemed freely,” says Viram Shah, Founder and CEO, Vested

“An India-listed international ETF can be bought in rupees through an existing demat account, without remitting money overseas. International ETFs typically also carry an annual expense ratio. But when an ETF trades substantially above NAV, the premium itself can become the biggest cost. A 20%, 50% or 100% premium overwhelms relatively small differences in brokerage or expense ratios,” adds Shah.

Compare the costs before you buy

For Indian global ETFs, the cost of buying units may look smaller, until the premium to NAV is counted. With international brokerage platforms, there are several charges to start with, like forex conversion and remittance costs, along with brokerage.

“On Vested, brokerage on US stocks and ETFs is 0.25% of the trade value on the Basic plan and 0.15% on Premium, capped at $35 per trade. There can also be forex/remittance costs depending on the banking route used.

But investors should compare those costs with the premium they may be paying on an India-listed ETF. Paying a reasonable forex and transaction cost can be very different from paying Rs 200 for an underlying asset worth Rs 100,” says Shah.

The bottom line

As access to global investing expands in India, investors must consider not only what they are investing in, but also how they are accessing it. Checking the iNAV before placing a transaction, especially for overseas ETFs, should become as common as checking the stock price.

Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investment in foreign securities involves significant risks, including currency fluctuations, different financial reporting standards, and varying regulatory environments. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor. Financial Express is not responsible for any decisions made based on this information.