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Kamal Kant/AI-generated
Summary: You place an order for an ETF that holds American shares. The trade goes through. Part of what you paid went into the fund. The rest went somewhere else entirely, and it is not a fee, not a spread and not anything the fund house charged you. Where it went changes what you think you own.
Between September 4 and September 9, the Nasdaq Q-50 index went nowhere. The Motilal Oswal Nasdaq Q50 ETF, which owns exactly those fifty companies, rose 50%.
Same shares. How?
An ETF has two prices: the NAV, what its shares are worth, and the market price, what the last buyer paid. Normally they match, because if the price drifts above NAV, a market maker gets fresh units from the fund house at NAV and sells them until the gap closes.
That mechanism is switched off. India's $1 billion pool for overseas ETFs filled in April 2024, and since then no fund house has been able to create new units. Only the old units remain. Buyers keep coming, because the funds of funds that invest abroad have shut and because a price that rises three days running attracts people who buy whatever is rising. Fixed supply, growing demand, and the price floats above NAV. That gap is the premium: a shortage charge, not a return.
For most of the past year it sat around 20 per cent. In three days it quadrupled.
The cap nobody designed
For four years an ETF's daily price band was 20 per cent either side of its NAV from two days earlier. For a fund whose price had left its NAV behind, that was an accidental ceiling: you could not close much more than 20 per cent above what the fund was worth. From January to August, the Q50 premium sat between 17 and 23 per cent and never broke through.
On September 7, SEBI's new rule moved the base to the previous day's traded price, with a 10 to 20 per cent band around it. For ETFs that can create units, a sensible tidy-up. For one that cannot, yesterday's price already includes the premium, so the band is drawn around the premium, and it can compound.
It did: 15.6 per cent on September 7, a day the US market was shut and the NAV did not move, then 19.3, then 8.8. The premium went from 19.5 per cent to 81.
Both fund houses put out notes on September 9. Mirae Asset's is an advisory: the old rule capped the gap at about 20 per cent; the new one lets it grow, so do not buy at a significant premium. Motilal Oswal's is an explainer that shows the arithmetic. Under the old method, the Q50 ETF could not have closed above Rs 142.60 on September 7 or Rs 142.48 on September 8. Under the new one, the ceilings were Rs 170.32 and Rs 196.91, and the fund closed within a rupee of each. Motilal's note ends by saying the price may move up by about 20 per cent daily. It does not say whether you should pay it.
Where the premiums stand now
| ETF | NAV (Rs) | Price (Rs) | Premium (%) | Avg, past year (%) |
|---|---|---|---|---|
| Motilal Oswal Nasdaq Q50 | 117.43 | 213.01 | 81.4 | 15.1 |
| Mirae Asset S&P 500 Top 50 | 66.71 | 97.01 | 45.4 | 19.6 |
| Mirae Asset NYSE FANG+ | 172.38 | 234.98 | 36.3 | 19.8 |
| Mirae Asset Hang Seng TECH | 18.14 | 23.09 | 27.3 | 19.8 |
| Motilal Oswal NASDAQ 100 | 273.52 | 344.7 | 26 | 11.1 |
| Nippon India Hang Seng BeES | 455.13 | 466.97 | 2.6 | 14.3 |
| Premium is the market price over the latest published NAV. Q50 row: price of September 9, NAV of September 8. Other rows: September 8. | ||||
What you are buying
A unit cost of Rs 213 on Wednesday. The shares inside it were worth Rs 117. The other Rs 96 is what you paid for the shortage, and shortages end: either the limit is raised, and units get made at NAV again, or sellers outnumber buyers on a counter that trades Rs 1.5 crore a day, with nobody able to short it and catch the fall. The Rs 96 can vanish while the fifty Nasdaq companies do nothing.
The index is fine. The fund is fine, at 0.52 per cent a year. Motilal Oswal cannot create units; and its document warned that a rule change could widen the premium.
So before you buy an international ETF, look up its NAV. If the price is far above it, you are not buying Nasdaq. You are buying a shortage.
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