Overseas ETFs: Nearly 30% of turnover at inflated prices
With Indian equities delivering paltry returns over the past two-and-a-half years, many investors have turned to overseas markets in search of better opportunities. However, this shift towards global investments, particularly US technology and Artificial Intelligence (AI) stocks, has brought an unexpected risk.
Stark disconnect
An overseas exchange-traded fund (ETF) worth about ₹118 a unit traded at as much as ₹396 on Indian exchanges last month. The episode highlights a stark disconnect between market price and underlying value, undermining the low-cost appeal of passive investing.
The price distortion is not confined to one ETF but reflects a broader phenomenon across all six international ETFs.
Together, these funds recorded a turnover of ₹10,440 crore on the NSE and BSE so far in 2026, of which an estimated ₹3,094 crore involved trades at prices above net asset value (NAV), according to an analysis by bl.portfolio.
Motilal Oswal Nasdaq Q50 ETF’s market price surged from ₹142 on September 4 to ₹396.30 on September 18, against an NAV of ₹118.14, taking its premium to 235 per cent. Buyers were paying more than three times the underlying asset value, knowingly or otherwise. The ETF’s market price subsequently plunged to about ₹188 on September 28 before recovering to ₹252 by October 9. Its NAV, however, rose to ₹123.80 on October 9 from ₹118.14 on September 18. The sharp divergence illustrates how ETF prices can fluctuate dramatically without comparable movements in their underlying investments.
An analysis of market-price premiums over NAV across 21 trading sessions in the past month reveals wide divergences. Mirae Asset S&P 500 Top 50 ETF averaged a 49 per cent premium, peaking at 83 per cent. Mirae Asset NYSE FANG+ ETF averaged a 35 per cent premium, Mirae Asset Hang Seng TECH ETF 24 per cent and Motilal Oswal Nasdaq 100 ETF 17 per cent. Nippon India ETF Hang Seng BeES was relatively insulated, averaging a premium of 3 per cent.
By contrast, overseas ETFs tracking similar indices traded at premiums or discounts ranging from a marginal 0.01 per cent discount to a 15 per cent premium. China’s Guotai Nasdaq-100 ETF traded at a 15 per cent premium to NAV, while South Korea’s Samsung KODEX US NASDAQ 100 ETF traded at a 0.01 per cent discount. South Africa’s Satrix S&P 500 ETF and China Southern S&P 500 ETF traded at premiums of 0.3 per cent and 8.6 per cent, respectively.
Trading surge
The six ETFs recorded about 25.3 lakh trades across the NSE and BSE during the 21-session period. Elevated trading activity, sharp price swings and steep premiums point to intense short-term speculation.
Jatin Vasaria, Head of Products, Passive Funds, Motilal Oswal AMC, said the Motilal Oswal Nasdaq Q50 ETF, which previously recorded daily trading volumes of around ₹4-5 crore on a good day, suddenly saw volumes jump to ₹50-60 crore. Such activity was unusual for the fund, he said.
The surge suggests that some traders who entered during the initial rally may have booked profits as prices corrected, while fresh buying may have supported the subsequent recovery.
Supply squeeze
The distortion stems from overseas investment limits of $7 billion for overseas securities and $1 billion for overseas ETFs. These caps have constrained domestic fund houses from creating fresh units despite sustained demand for global equities.
Normally, authorised participants create or redeem ETF units to keep market prices aligned with NAV through arbitrage. Restrictions on fresh unit creation weaken this mechanism, allowing premiums to widen when demand outstrips supply.
The sharp price movements have also coincided with changes to the framework governing ETF trading bands. Following SEBI’s June 15 circular, exchanges implemented revised trading parameters from September 7, changing the reference used to determine permissible price movements. Previously, the reference NAV was from two trading days earlier (T-2). Under the revised mechanism, the base price is linked to the previous trading day’s closing price. This may have enabled sharper price movements in ETFs already facing supply constraints.
SEBI has also asked exchanges and asset management companies to work towards adopting the previous trading day’s closing NAV as the base price from April 1, 2027.
The unusual premiums have prompted warnings from both the NSE and BSE. They could narrow if overseas investment limits are raised, allowing fund houses to create fresh units, or as changes to the T-1 NAV-based price-band framework take effect.
For investors, the risk is two-fold: A decline in overseas markets and an erosion of the premium paid to acquire ETF units. Even if the underlying securities hold their value, a sharp contraction in the premium could cause substantial losses for investors who buy at elevated market prices.
Regulatory changes could eventually ease these distortions, potentially triggering a swift and sharp correction in ETF prices.
Published on October 10, 2026