BSE cautions investors as international ETFs trade at steep premiums to NAV. What should investors do?

The Bombay Stock Exchange (BSE) has cautioned investors and market participants about certain exchange-traded funds (ETFs), particularly those investing in overseas securities, that are trading at substantial premiums to their net asset value (NAV).

The exchange said the NAVs of the underlying schemes have remained broadly stable, while mutual funds have been unable to create fresh units because the overseas investment limits available to the mutual fund industry have been fully utilised.

According to a release, BSE said that, “It has been observed that units of certain Exchange Traded Funds (ETFs), particularly those investing in overseas securities (international ETFs) are trading at a substantial premium to their Net Asset Value (NAV), even though the NAVs of the underlying scheme of these ETFs have remained broadly stable.”


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It further said that, “since the overseas investment limits available to mutual funds are fully utilized, no new units in these ETFs can be created by the Mutual Funds as it is restricted.”

BSE said that investors purchasing such units at steep premiums are exposed to the risk of abrupt fall in price, unrelated to the movements in the underlying including on enhancement of overseas investment limits or on migration of the base price for ETF price bands to the T-1 day NAV of the ETFs effective from April 1, 2027, in terms of paragraph 4.4 of the SEBI circular dated June 15, 2026.

For example, if the underlying assets are worth Rs 100 per ETF unit but the ETF is trading at Rs 150, an investor buying at Rs 150 is paying a 50% premium over the underlying value. If that premium subsequently disappears while the underlying assets remain unchanged, the ETF's market price could fall towards Rs 100.

Why are some international ETFs trading at a premium?

ETFs generally trade close to the value of their underlying assets. However, when the supply of fresh units is constrained while investor demand remains strong, the market price can move significantly above the NAV.

India-listed international ETFs have faced such supply constraints because mutual funds have utilised their permitted overseas investment limits. As a result, fund houses cannot create additional units even when demand for these ETFs increases.

What could cause the premium to fall?

According to BSE, such a decline could occur if the overseas investment limits are enhanced, allowing mutual funds to create fresh ETF units.

Another factor is a change in the way ETF price bands are calculated. Under the SEBI circular dated June 15, 2026, the base price for ETF price bands is set to migrate to the previous trading day's NAV from April 1, 2027. The relevant provisions came into effect from September 7, 2026.

The combination of additional ETF supply and changes in price-band calculations could affect the premium at which some international ETFs are currently trading.

What changed from September 7?

From September 7, investors in exchange-traded funds (ETFs) could see fewer instances of prices drifting significantly away from their underlying value, particularly during sharp market moves.

The changes are particularly significant for gold and silver ETFs, which now have a pre-open auction and greater flexibility for price bands to expand when global bullion prices move sharply overnight.

One key change is how exchanges determine the base price for applying price bands. Under the existing framework, exchanges use the ETF’s Net Asset Value (NAV) from two trading days earlier, or T-2, for this purpose.

For ETF investors, the changes are expected to bring ETF prices closer to the value of their underlying assets, reducing instances of large premiums or discounts to NAV.

They could also improve liquidity and price discovery, especially during volatile market conditions, while making trading in commodity ETFs more efficient.

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What should investors do?

BSE has advised investors to exercise extreme caution and conduct due diligence before placing orders in such ETFs. Investors should verify the NAVs available on the stock exchange, the Association of Mutual Funds in India (AMFI) website or their trading application or terminal.

Investors should not look at the traded price of an international ETF in isolation. They should first check the latest NAV or indicative NAV and compare it with the market price before placing an order.

Investors should also carry out due diligence on the ETF's liquidity and trading conditions. BSE has specifically advised investors to verify NAV information through the stock exchange, AMFI website or their trading application or terminal.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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