The Bombay Stock Exchange has issued a caution to investors regarding certain international exchange traded funds that are currently trading at substantial premiums to their net asset value. BSE said investors should exercise extreme caution when considering such ETFs because their market prices can decline sharply if the premium over NAV narrows. Importantly, such a correction can happen even when the value of the overseas securities held by the fund remains broadly stable.
The warning is relevant to Indian investors seeking exposure to international markets through India listed ETFs. These products allow investors to gain exposure to overseas securities through units traded on Indian stock exchanges. Under normal circumstances, the market price of an ETF is expected to remain relatively close to the value of its underlying holdings. However, supply and demand in the exchange market can cause the traded price to move above or below the underlying NAV.
NAV, or net asset value, represents the per unit value of the assets held by an investment scheme after accounting for relevant liabilities. When an ETF trades above its NAV, the difference is known as a premium. For example, if the underlying value of an ETF is Rs 100 but its market price is Rs 150, investors buying the ETF at that point are paying a 50 percent premium over the underlying value.
BSE said certain international ETFs have been trading at substantial premiums even though the NAVs of their underlying schemes have remained broadly stable. According to the exchange, the situation is linked in part to the availability of overseas investment capacity and the restrictions affecting the creation of fresh units.
The overseas investment limits applicable to Indian mutual funds can restrict fund houses from creating additional units when the relevant limits have been utilised. When investor demand remains strong but the supply of ETF units does not increase at the same pace, the market price can move considerably above NAV.
This creates an additional risk for investors entering the ETF after a large premium has already developed. An investor's return is influenced not only by the performance of the underlying overseas securities but also by the premium or discount at which the ETF trades. If the overseas assets remain unchanged but the premium falls, the ETF's market price can decline.
For instance, if an ETF has an NAV of Rs 100 and trades at Rs 150 because of a 50 percent premium, a subsequent reduction in that premium can result in a significant decline in the market price. This can happen without any equivalent fall in the underlying international shares. Business Standard reported that the market price of an international ETF depends on both the performance of its underlying assets and the premium or discount at which it trades.
The issue has become more visible in India's international ETF market during September 2026. Business Standard reported that some international ETFs had been trading at premiums significantly above their underlying NAVs. The report noted that the average premium across international ETFs had generally been around 15 percent to 20 percent over the previous year but had increased substantially for some products during September.
One example cited in the report was the Motilal Oswal NASDAQ Q 50 ETF, whose premium reportedly reached as high as 235 percent on September 18, 2026. This means that investors buying at that level were paying considerably more than the underlying value represented by the ETF's NAV. Such situations demonstrate why investors need to look beyond recent price performance when evaluating an exchange traded fund.
The premium issue is primarily connected to supply and demand. Anand K Rathi, co founder of MIRA Money, told Business Standard that when demand for international exposure rises while the number of available ETF units remains restricted, the market price can move significantly above NAV. The situation does not necessarily mean that the underlying overseas companies have suddenly become more valuable by the same percentage.
Another factor relevant to the recent market environment is the regulatory framework governing ETF trading. SEBI introduced changes concerning the base price, price bands, pre open call auctions and close out procedures for ETFs. The revised framework began coming into effect in September 2026 following regulatory changes and subsequent implementation extensions.
Market reports have highlighted how the revised ETF trading framework and restrictions on the creation of fresh units can interact with strong investor demand. Moneycontrol reported that investors should look at live indicative NAV before placing orders instead of relying only on the last traded price.
The BSE warning therefore focuses on an important distinction between an ETF's market price and its underlying value. Investors may see an international ETF rising sharply on the exchange and assume that the underlying overseas market has produced a similar gain. However, a portion of that increase may come from the premium created by demand and limited availability.
If that premium subsequently decreases, the ETF price can correct even if the overseas market remains steady. This is why the performance of an ETF should not be assessed solely by looking at its exchange price over a short period.
BSE has advised investors and market participants to conduct due diligence and check the NAV before placing orders. The exchange said investors can obtain NAV information through the stock exchange, the Association of Mutual Funds in India website, their trading application or trading terminal.
Investors should also understand the difference between NAV and indicative NAV. NAV generally reflects the calculated value of the scheme's holdings, while indicative NAV can provide an estimate of the underlying value during trading hours. Comparing the market price with the available NAV or indicative NAV can help investors identify whether an ETF is trading at a substantial premium or discount.
The risk is particularly important for investors who are considering an ETF after seeing a sharp rise in its exchange traded price. Buying at a large premium can expose the investor to two separate sources of movement. The underlying overseas securities can rise or fall, while the premium attached to the ETF can also increase or decrease.
Business Standard quoted experts as saying investors should consider the ETF's premium relative to its historical range and also take into account taxation, transaction costs and liquidity before making decisions.
The warning does not mean that international ETFs as a category will necessarily decline. It specifically highlights the risk associated with purchasing units at unusually high premiums to their NAV. The underlying international investments may continue to perform independently of the premium attached to the India listed ETF.
For investors already holding such ETFs, the situation is different from that of a new buyer. Existing investors need to consider when they purchased the units, the premium at that time, current NAV, the current market price, applicable taxes and transaction costs. The decision to hold or sell depends on the individual investor's circumstances and investment objectives.
The recent developments show why investors should examine the structure of an ETF before making an investment decision. International diversification can provide access to overseas markets, but India listed international ETFs can also be affected by domestic supply constraints, investment limits, liquidity and exchange demand.
The BSE warning is therefore a reminder that an ETF's quoted market price does not always represent the same value as its underlying holdings. When a substantial premium develops, a correction in that premium can have a significant effect on the investor's return.
Investors considering international ETFs should therefore compare the latest traded price with the available NAV or indicative NAV and understand why any premium exists. The BSE has specifically urged investors to exercise caution and conduct due diligence before placing orders.
As international investing continues to attract Indian investors, the difference between market price and underlying value is likely to remain an important consideration. The latest BSE advisory highlights that strong demand and limited unit supply can create price distortions, making it important for investors to assess valuation rather than relying only on recent price movements.
