Motilal Oswal ETF Premium Spikes 73% Amid Supply Constraints

The Motilal Oswal Nasdaq Q50 ETF experienced a significant divergence between its market price and intrinsic value during the week of September 4 to 10. While the fund's closing price jumped 41% from ₹141.99 to ₹199.89, the value of its 50 underlying US stocks fell by 2.6% according to data from Value Research. This disconnect pushed the ETF's trading price to a 72.8% premium over its net asset value (NAV), which stood at ₹115.69 on September 10. As reported by GN stocks/nasdaq, this extreme valuation gap highlights structural constraints in the Indian market for international equity products.

The primary driver of this premium is the inability to create new units to meet rising demand. India’s overseas investment limits for ETFs were reached in April 2024, effectively freezing the creation of new shares for international funds. With the supply of existing units fixed, any increase in buyer interest translates directly into higher market prices rather than increased volume. This scarcity effect has intensified trading activity, with daily volumes surging to approximately ₹43 crore on September 9, a sharp contrast to the average daily turnover of around ₹1.4 crore observed in prior periods.

Regulatory Rule Change Accelerates Price Dislocation

A concurrent change in exchange rules governing price bands exacerbated the upward drift. Prior to September 7, the allowable trading range for ETFs was calculated based on the NAV from two trading days earlier. Under the new framework, the reference point shifted to the previous day's traded market price. For an asset already trading at a premium, this modification allowed the daily closing price to set a higher ceiling for the next session, creating a compounding effect on the valuation gap.

Motilal Oswal Mutual Fund illustrated this impact in an internal note, noting that under the old mechanism, the price ceiling on September 8 would have been capped at ₹142.48. Under the new rules, the ceiling rose to ₹196.91 for the same day. The ETF closed at ₹169.87 on September 8 and reached ₹199.89 by September 10, staying well within the newly expanded, higher bands. This regulatory shift removed a key anchor that previously constrained premiums to more moderate levels.

Premium Trends And Market Implications

The premium on the Nasdaq Q50 ETF expanded rapidly over the five-day period, rising from 19.5% on September 4 to 38% on September 7. It further climbed to 67% on September 8 and peaked at 83% on September 9 before settling at 72.8% on September 10. This trajectory indicates that the market price is driven by speculative demand and structural supply limits rather than the performance of the underlying US technology and growth stocks.

This phenomenon is not unique to the Motilal Oswal fund but is part of a broader trend in India-listed international ETFs. Other funds holding foreign assets are also trading above their NAVs due to similar constraints on unit creation. However, the magnitude of the premium varies significantly across different products, depending on their specific underlying assets, liquidity, and trading volumes. Investors must recognize that a high market price does not equate to high portfolio value, creating a risk of overpayment relative to the actual assets held.