Ignoring Intraday Net Asset Value May Increase Costs of Gold, Silver, and Global ETFs

ETF Pricing Gaps Highlight Importance of Indicative Net Asset Value (iNAV)

February 23, 2024

The divergence between closing prices and indicative net asset values (iNAVs) for commodity and international Exchange Traded Funds (ETFs) in India has highlighted the potential for investors to pay more than the underlying value of the fund. On February 23, the closing prices of some ETFs showed a clear pricing gap from their iNAVs.

Key Findings:

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• Nippon India Silver ETF closed at Rs 249.90, a discount of Rs 3.82 from its iNAV of Rs 253.72.
• Baroda BNP Paribas Gold ETF closed at Rs 152.25, a premium of Rs 3.07 from its iNAV of Rs 149.18.
• Groww Gold ETF traded at a noticeable discount, with a close of Rs 15.37 compared to an iNAV of Rs 18.50, a gap of more than Rs 3.

Market Dynamics:

The noticeable mismatch between net asset value (NAV), iNAV, and market price for gold, silver, and international ETFs in India is primarily driven by high investor demand, limited liquidity for underlying assets, and regulatory constraints. The market-making/creation process may not adjust instantly in fast markets, leading to wider price gaps.

Importance of iNAV:

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Checking iNAV matters, as it provides a frequently updated, intraday estimate of the ETF's underlying value. It helps investors see whether they are buying at a premium or selling at a discount to fair value. Ideally, the market price at which the ETF trades should stay close to this value.

Regulatory Proposals:

The Securities and Exchange Board of India (Sebi) has proposed a comprehensive review of the framework related to base price determination and price bands for Exchange Traded Funds (ETFs). The regulator has proposed shifting to a T-1-based benchmark for determining the base price on the trading day (T-day) and rationalizing the existing uniform ±20 percent price band applicable to most ETFs.

Investor Discipline:

A simple habit can help investors avoid this issue: regularly checking iNAV and spreads, particularly during volatile times. This discipline can have a bigger impact on returns than the ETF's expense ratio.