International ETFs: A golden opportunity or a premium trap?

Mirae Asset NYSE FANG+ ETF has been on cloud nine in the last couple of years: the best-performing fund in 2023 and the fifth-best in 2024. It's not just them.

The other international funds and ETFs have been firing on all cylinders as well, leaving their domestic colleagues in the dust.

This great run has many investors wondering: "Is it time to join the party?"

And our take is 'No'. Steer clear.

Why?

All six international ETFs are trading at a premium, meaning that their buying prices exceed their actual market values. This situation poses a risk for investors, as purchasing at inflated prices can lead to potential losses.

(Know why ETFs are traded at a premium)

Premium ETFs pose risk of loss

Here's a real-life example to explain why buying ETFs at a premium is fraught with risk.

Suppose an investor invested Rs 1 lakh in the Mirae Asset NYSE FANG+ ETF on April 19, 2024, when the price was 97.1, a 26.3 per cent premium over the NAV. By June 28, 2024, when the price and NAV almost converged, the investment dropped to Rs 97,189. This loss wasn't due to the underlying stocks performing poorly—in fact, they did pretty well, as indicated by the 21.4 per cent growth in NAV (from Rs 76.9 to Rs 93.4) over the same period. The loss occurred because the investor paid Rs 97.1 per unit for something worth only Rs 76.9 per unit at the time.

Essentially, investing in an ETF at a premium often leads to financial setbacks.

Here are a few observations gleaned from the table above:

• Most of the ETFs usually don't have premiums above 5 per cent. So, premiums remain within a comfortable range for most part. That said, they are on the higher side at this point due to growing clamour for overseas investing.
  
• While some ETFs might converge to their NAVs in just a day, others could take up to 240 days. The crucial point, however, is that all of them converged within a year. So, if someone invested in these ETFs at a premium, there's a strong likelihood they could have faced losses or will face losses in the long run.

What you should do

• Before investing in ETFs, checking the iNAV can help you make more informed decisions. For domestic ETFs, iNAV reflects the real-time estimate of the fund's value based on its underlying securities. However, for international ETFs, iNAV is typically based on the previous closing prices of the tracked securities. You can find the iNAV on the stock exchange's website or the fund house's website during market hours.
  
• And if you have to invest overseas, consider investing when the premium is on the lower side to minimise risks.

Also read: Momentum funds: Crazy highs to crippling lows