Motilal Oswal Nasdaq Q50 ETF jumps 41% in a week even as underlying US stocks fall. What is happening?

The Motilal Oswal Nasdaq Q50 ETF has seen an extraordinary jump in its market price over the past week, even as the value of the US stocks it holds has moved lower.

Between 4 and 10 September, the ETF's price on the stock exchange rose 41%, from ₹141.99 to ₹199.89. Over the same period, the value of the 50 stocks in its portfolio fell 2.6%, according to Value Research data.

The divergence has pushed the ETF's market price well above its NAV. On 10 September, its NAV was ₹115.69, compared with a closing market price of ₹199.89. This represented a premium of 72.8%, according to Value Research.

The sharp increase in the premium has been linked to limited availability of units in the ETF, strong demand on the exchange and a recent change in the rules governing ETF price bands.

Why has the Q50 ETF moved so far above its NAV?

An ETF's NAV reflects the value of the securities held by the fund. Its market price, meanwhile, is determined by buying and selling on the stock exchange.

Normally, the two prices remain relatively close because ETF units can be created when demand increases. The additional units provide more supply in the market and help keep the traded price aligned with the value of the underlying portfolio.

For international ETFs such as the Nasdaq Q50, that mechanism has been constrained by India's overseas investment limits.

The overseas investment limit for ETFs was reached in April 2024, after which fresh units could not be created in the same manner. With the supply of existing units limited, an increase in demand can instead show up as a higher market price.

The Q50's premium to NAV was 19.5% on 4 September, according to Value Research. It rose to 38% on 7 September, 67% on 8 September and 83% on 9 September, before settling at 72.8% on 10 September.

Trading activity also increased substantially. The ETF recorded about ₹43 crore in trading on 9 September, compared with its average daily volume of around ₹1.4 crore over the previous period, Value Research data showed.

How did the SEBI rule change affect the premium?

The sharp move coincided with a change in the way price bands for ETFs are determined.

Under the earlier framework, the price band was linked to the ETF's NAV from two trading days earlier. From 7 September, the reference point shifted to the ETF's previous day's traded price.

This created a significant difference for an ETF that was already trading at a premium to its NAV.

For instance, if an ETF had an NAV of ₹100 but was trading at ₹120, using the previous day's traded price as the reference point meant that ₹120, rather than ₹100, would determine the following day's trading range.

As the Q50's market price moved higher, each day's higher closing price could therefore become the reference for the following day's price band.

Motilal Oswal Mutual Fund highlighted the impact in a note issued during the week. It said the Q50 could have closed at no more than ₹142.60 on 7 September and ₹142.48 on 8 September under the earlier mechanism. Under the new framework, the corresponding ceilings were ₹170.32 and ₹196.91. The ETF subsequently closed at ₹169.87 on 8 September and ₹199.89 on 10 September, according to Value Research.

The pricing gap is not limited to the Motilal Oswal Nasdaq Q50 ETF. Other India-listed international ETFs have also seen their market prices move above their NAVs amid limited unit creation and increased demand. The extent of the premium, however, varies across ETFs depending on their underlying assets and trading activity.