Spurt in India-listed US ETFs stumps Dalal Street
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,…
Mumbai witnessed a baffling surge in India-listed exchange-traded funds (ETFs) tracking US equities, leaving market participants perplexed. Despite no significant trades on Wall Street, these ETFs experienced a staggering surge of 2% to 19% on Tuesday. The usual Wall Street high on Monday due to Labour Day celebrations did not influence the market.
In fact, US benchmark indices saw minor declines, with the S&P 500 down 0.4%, Nasdaq dropping 0.3% and Dow Jones falling 0.5%. This puzzling movement of India-listed ETFs was attributed to a change in the calculation methodology for circuit limits, introduced by the Securities and Exchange Board of India (Sebi). Earlier, these ETFs were limited to a 20% deviation from their Net Asset Value (NAV), but now, the circuit limits are calculated based on the previous day's closing price, mirroring domestic ETFs.
This change has widened the gap between the iNAV (Indexed Net Asset Value) and market prices, potentially leading to sharper price divergences. The surge in global ETF prices over the past two days can be attributed to this new calculation methodology. US-centric ETFs listed on domestic bourses have been in demand in recent months, with trading at premiums of 26-65% to their indicative net asset values.
The mutual fund industry has already exhausted the $1 billion limit for investments in overseas ETFs, resulting in a surge in demand for US equity exposure that has outstripped supply. Trading volumes in these funds also saw a sharp increase on Monday and Tuesday compared to the past few weeks, with Motilal Oswal Nasdaq Q 50 ETF alone witnessing over 10 lakh units change hands on Tuesday.
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