Mumbai: Surprising Surge in ETFs Linked to US Stocks
On Tuesday, several investors were taken aback by a remarkable rise in exchange-traded funds (ETFs) in India that are linked to US stocks. These ETFs experienced a jump of 2% to 19%, even though there weren’t significant movements in U.S. markets. Notably, the U.S. stock markets were closed on Monday in observance of Labor Day, and the previous Friday saw slight declines in major indices: the S&P 500 fell by 0.4%, the Nasdaq by 0.3%, and the Dow Jones by 0.5%.
Amidst this backdrop, India-listed ETFs, such as the Motilal Oswal Nasdaq Q 50 ETF and Mirae Asset S&P 500 Top 50 ETF, witnessed substantial gains, increasing anywhere from 6% to 37% over the past couple of days. The Motilal Oswal Nasdaq Q 50 ETF, for instance, surged by an impressive 19.3% and even reached its maximum trading limit of 20% during the day. Meanwhile, the Mirae Asset S&P 500 Top 50 ETF finished the day with nearly a 13% rise.
Industry insiders believe that part of this rally can be traced back to a recent update in how circuit limits are calculated, as introduced by the Securities and Exchange Board of India (Sebi). One executive explained, “The spike in global ETF prices recently is due to the change in the way circuit limits are determined. Previously, ETFs had limits of plus or minus 20% based on their net asset values (NAVs), but now these are calculated based on the previous day’s closing price, aligning them with domestic ETFs.”
This change has effectively widened the circuit limits, which may result in greater discrepancies between the indicative net asset values (iNAV) and actual market prices of these ETFs, as the price boundaries have shifted upwards.
In recent months, US-centric ETFs that are listed in India have garnered increased interest from investors. According to data from Samco Securities, these ETFs are currently trading at premiums ranging from 26% to 65% above their indicative net asset values.
The growing demand for US funds is driven by their better performance compared to Indian equities. Notably, the mutual fund industry has already reached its $1 billion limit for investments in overseas ETFs, limiting fund houses’ abilities to create new units. Consequently, the demand for access to US equities has outpaced supply.
Trading volumes for these funds also saw a significant uptick on Monday and Tuesday, in contrast to prior weeks. For instance, the Motilal Oswal Nasdaq Q 50 ETF saw over 1 million units exchanged on Tuesday, a sharp increase from 560,000 units on Monday and much higher than the 17,000 and 11,000 units traded on the previous Thursday and Friday, respectively.
This unexpected activity in India’s ETF market reflects a growing appetite for US equity exposure among investors.
