Global ETF Craze Has Retail Buyers Paying Steep Premiums
Investors diving into international ETFs are facing a perilous situation. With the Reserve Bank of India (RBI) potentially lifting overseas investment limits, the current steep premiums seen on many of these products could vanish almost overnight. Here’s what you need to know amidst the ongoing global ETF craze.
The Allure of International ETFs
Retail investors are flocking to mutual fund schemes focused on overseas equities, attracted by impressive returns compared to local equities. Over the past year, international funds have yielded an average return of 28%, vastly outperforming the Nifty’s return of just 12.8%. However, in the rush to capitalize on these opportunities, investors may be overlooking crucial risks.
Steep Premiums: A Cause for Concern
Many exchange-traded funds (ETFs) are currently trading at a 20% to 25% premium over their net asset values (NAV). This inflated pricing leaves investors vulnerable to significant losses if the RBI decides to open the investment floodgates. Many schemes have reached the central bank’s overseas investment cap of $7 billion for mutual funds, and an additional $1 billion for ETFs, making new subscriptions impossible for some funds. Thus, investors must navigate these premiums carefully.
– Current Premiums of Notable ETFs:
– Nippon India Hang Seng ETF: 21%
– Mirae Asset Hang Seng Tech ETF: 23%
– Mirae Asset S&P 500 Top ETF: 18%
– Mirae Asset NYSE Fang+ ETF: 19%
– Motilal Oswal Nasdaq 100 ETF: 2-3%
Market Dynamics and Investor Behavior
“Retail investors often buy ETFs without considering the premium or discount to their NAV,” cautions Chetan Nandani, founder of Prime Care Investments. This behavior is leading to overcrowding in top-performing ETFs, further driving up their prices. Kunal Valia, founder of Statlane and a Sebi-registered research analyst, notes that the inability to create new units to meet demand is compelling investors to purchase ETFs on the secondary market, exacerbating valuations.
Exploring Alternatives
Investors do have alternatives, albeit with some drawbacks. The Liberalised Remittance Scheme allows for buying ETFs abroad but comes with high transaction fees and the complexity of dealing with different brokerage accounts and compliance. Another option is investing in international funds established in GIFT City; however, the minimum investment of $5,000 makes this pathway accessible only to higher-ticket investors.
The Potential Risks Ahead
Investing in international ETFs during this frenzy carries notable risks. If the RBI decides to loosen its limits, premiums could evaporate rapidly, causing significant losses for those who have bought in at inflated prices. Nandani warns, “Such investors could easily face a capital loss of 20-25% if changes in RBI policy occur.”
Conclusion: Exercise Caution in the Global ETF Craze
As the global ETF craze continues, it’s essential for retail investors to remain vigilant and informed. By understanding the risks associated with the steep premiums currently dominating the market, investors can make more prudent decisions that protect their capital. Investing in international markets can be lucrative, but the current landscape is fraught with potential pitfalls that require careful consideration.