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Do ETF NFOs result in listing gains similar to stocks? - Anonymous
Yes, they do. But they are a far cry from the epic IPO (initial public offering) listing gains we have grown accustomed to in the last couple of years. Say hello to Paras Defence , with 185 per cent gains on the first day of the stock market, and Tata Technologies , at 162.85 per cent. (But that's not to say we endorse IPOs. More on that later.)
The reason ETF NFOs (new launches of exchange-traded funds) are a lot less spicy is because they are structurally different from company stocks. Being passive funds, ETFs only intend to replicate the performance of a particular index. Their units are created likewise and sold during an NFO. As a result, an ETF's so-called listing gains can be far more modest.
Even if an ETF has high demand in a positive market, the 'listing gains', most likely, won't be substantial. That's because when we analysed around 150 ETF NFOs launched between 2002 and 2024, here's what we learnt:
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Although 90 of the 150 ETFs were trading at a premium (similar to listing gains in the ETF world) at the end of their first day on the stock exchange, most were being bought and sold at only a 0 to 5 per cent premium, which is not a sizable investor gain.
- Only 11 ETFs in the last 21 years traded at a premium of more than 5 per cent.
| Trading at | Number of NFOs |
|---|---|
| Less than 10% discount | 1 |
| Between 5-10% discount | 2 |
| Between 0-5% discount | 57 |
| Between 0-5% premium | 79 |
| Between 5 to 10% premium | 4 |
| More than 10% premium | 7 |
In summary, although new ETFs can be sold at a premium, it's hardly significant. Further, even if some ETFs trade at a 5 per cent-plus premium on their listing day, the bump will likely reduce the next day, aligning the ETF's per unit price closer to its NAV.
So, if you are looking to earn windfall gains, ETF NFOs may not be the ideal option. Neither are IPOs, as only a handful of companies gun out impressive returns. We recommend investing in an equity instrument (mutual fund or stocks) with a long-term investment outlook (at least five years).
Also read: Ask these three questions before investing in an NFO
This article was originally published on June 25, 2024.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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