ETF aren’t Stocks

In 1994, Morgan Stanley came up with its first India based Mutual fund aptly named Morgan Stanley India Growth Fund. Investors who had no clue about Mutual funds, felt this could be a IPO opportunity similar to the forced IPO’s of multinational companies in late 1970’s.

Forms were sold at a premium and even before listing, the stock was trading at a wild premium. While I wasn’t a participant there, I wonder how the investor felt when he saw the IPO open below par. The amount the fund collected was way above their own expectations but unfortunately for investors, the investment (even for those who bought at IPO price and not at a premium) was a investment that didn’t prove its worth.

These aren’t early days for Exchange Traded Funds and yet I was surprised to see a investor willing to buy a Index ETF at a 15% premium to the NAV (for a long time Morgan Stanley India Growth Fund was actually trading at a discount to its NAV, so much was the disappointment for the Investor who had literally given up on it).

Most Index ETF’s are a fraction of the Index they track. While some are 1 / 10 of the Index, some others are 1 / 100. But the smaller the fraction, larger the chance for buying / selling at levels which the Index isn’t trading.

Take for example the Edelweiss Mutual Fund – Edelweiss ETF – Nifty Quality 30. The ETF is a 1 / 10 tracker of Nifty Quality 30 Index. While Nifty Quality 30 currently stands at 2099, the NAV of the fund is at 211.42 (positive Tracking Error).

On NSE though, its last traded price is 241. Now, 30 bucks in a stock may not mean a big thing. After all, stocks can and do move big time a lot of times. But 241 on the fund is equivalent to 2410 (approx) on the Index, something the Index hasn’t seen till date (All time high being 2292).

To give a better comparison, Nifty is currently trading at 8180. Would you be willing to buy it at 9300 levels right now?

While we have seen growth in ETF’s in India, the liquid ones are still very few. When you go out to buy a ETF, do note that slippage can harm your returns by a margin that you weren’t expecting when you placed the order. Remember that while ETF’s trade like a share, they move like a Index. So, don’t pay for a tortoise assuming it will run like a Hare.