Spurt in India-listed US ETFs stumps Dalal Street

Synopsis

India's exchange-traded funds that mirror US equities experienced a surprising spike, with gains from six to thirty-seven percent over two days, despite Wall Street remaining relatively unchanged. This significant upswing has been attributed to a recent adjustment by Sebi regarding circuit limit calculations. The new methodology enhances conformity between global and domestic ETF limits, resulting in expanded price variability.

Mumbai: Several market participants were left puzzled by the unprecedented surge in India-listed exchange-traded funds (ETFs) tracking US equities. These ETFs surged by 2% to 19% on Tuesday despite no big upmoves on Wall Street.

US markets were shut on Monday for Labour Day. On Friday, benchmark indices ended marginally lower, with the S&P 500 declining 0.4%, the Nasdaq shedding 0.3% and the Dow Jones falling 0.5%.

Even so, India-listed ETFs tracking these indices, including Motilal Oswal Nasdaq Q 50 ETF, Mirae Asset S&P 500 Top 50 ETF, Mirae Asset NYSE FANG+ ETF and Motilal Oswal NASDAQ-100 ETF, jumped between 6% and 37% over the past two days.

ET Bureau

On Tuesday, Motilal Oswal Nasdaq Q 50 ETF jumped 19.3% after hitting its maximum permissible trading limit of 20% during the session. Mirae Asset S&P 500 Top 50 ETF ended nearly 13% higher.

Some mutual fund industry officials attributed part of the rally to a recent change in the calculation methodology for circuit limits introduced by the Sebi.

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"The reason we have seen a jump in global ETF prices over the last two days is a change in the methodology used to calculate their upper and lower circuit limits," said an industry executive who declined to be identified. "Earlier, these ETFs were subject to circuit limits of plus or minus 20% relative to their NAVs. Now, the circuit limits are calculated based on the T-1 closing price, bringing them in line with domestic ETFs," the executive said.

"As a result, the circuit limits have been pushed further away, which could lead to a sharper divergence between the iNAV and market prices of these ETFs, as the price caps have shifted higher."

US-centric ETFs listed on domestic bourses have been in demand in recent months, with data from Samco Securities showing these ETFs are trading at premiums of 26-65% to their indicative net asset values.

The sharp premiums in global ETFs have also been on account of the investor appetite for US funds, which have performed better than Indian equities. With the mutual fund industry already exhausting the $1 billion limit for investments in overseas ETFs, fund houses have not been able to create fresh units, resulting in demand for US equity exposure outstripping supply.

Trading volumes in these funds also picked up sharply on Monday and Tuesday compared with the past few weeks.

Motilal Oswal Nasdaq Q 50 ETF, for instance, saw more than 10 lakh units change hands on Tuesday, up from 5.6 lakh units on Monday and about 17,000 and 11,000 units on Friday and Thursday, respectively, according to data from Dhan.