Analysts say this may be due to lack of liquidity, but can’t explain the volatility.
Although a scarcely invested product in India, exchange-traded funds (ETFs) on the Bombay Stock Exchange (BSE) do not seem to be reflecting their benchmark and are witnessing abnormal price movements.
Index-based ETFs listed on BSE are showing a huge difference between their last traded price and their NAVs (net asset values). Ideally, the NAV should be close to the last traded price.
An ETF is a basket of securities traded on the stock exchange, like a stock. So, unlike mutual funds, ETFs are listed on recognised stock exchanges. Their units can be bought and sold directly on exchanges during trading hours.
However, the difference in the market price and the NAV is defeating the purpose of these instruments. ICICI Prudential's Spice ETF, which tracks 30 Sensex stocks, shows a difference of 13 per cent between its last traded price and the NAV. Its last traded price on the exchange was Rs 189 (on February 2), but the NAV is Rs 167.87.
Similarly, in case of UTI Sunder, which tracks the Nifty, the difference is 28.2 per cent. In case of Quantum's Index ETF, which tracks the Nifty, the gap is 17 per cent.
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However, such variation is not seen in case of ETFs traded on the National Stock Exchange. Analysts said lack of liquidity was the main reason for abnormal price movements in these ETFs. Since these are illiquid instruments, there are instances when there are only buyers. In such a scenario, the price keeps going up.
“It clearly shows negligence on the part of AMCs (asset management companies) towards ensuring liquidity. The fund houses do not bother about ETFs after they are launched. Since the investor base is small, it will result in the market price being different from the NAV. However, in spite of having a lower investor base, the wild price movements in these ETFs in the past few weeks is quite strange,” said a mutual fund industry official.
The tracking error in the three ETFs, too, has been more than normal. According to the industry norm, the tracking error in case of an index ETF should not be more than 0.5 per cent. But, ICICI Prudential's Spice ETF has a tracking error of close to 6 per cent on a one-year basis. While the one-year trailing return for the fund is 75.45 per cent, the TRI (total return index) Sensex is 82.05 per cent, according to Value Research data.
“Some tracking error would have cropped up due to volatility in the market. As the market has shown extreme intra-day gyrations during the past few days, the reaction time taken by fund managers to adjust the portfolio could be one reason,” said Deepak Sharma, chief executive, Sarthi Wealth Management Consultants.
For UTI Sunder, the tracking error for one year is 2.07 per cent while Quantum's Index ETF has shown a tracking error of close to 3 per cent, unusual for ETFs.
“ETFs are not very popular investment products in India. The assets managed by ETFs are negligible as compared to total industry assets. The tracking error could be due to the difference in weightages between the fund and the index. Also, the fund manager would not have been able to buy all stocks at one point of time or capture price movements effectively,” said Krishnan Sitaraman, head of fund services at Crisil.
The mutual fund industry manages Rs 1,031 crore under ETFs, according to latest official data. ETFs as a category saw net outflows of Rs 157 crore in December.