Should I Invest in an Indian Listing of a US ETF or the US ETF Directly?

The interest in investing in the US stock market has surged in India. The US markets have outperformed the Indian markets in the last decade. Their resilience in the current pandemic has made Indian investors take notice and start diversifying their portfolio internationally.

But we’ve seen international investment opportunities available in India. So why bother investing overseas? Here is an analysis of two trackers of the Nasdaq 100 Index – one listed in India and the other in the US.

Although the India-listed Motilal Oswal Nasdaq 100 ETF (MOFN100) was launched in 2011, its AUM grew significantly only this year. On the other hand, the US-listed Invesco QQQ ETF has been around for over two decades and is an extremely liquid ETF with over 100 Bn dollars of assets under management. Here’s a quick overview comparing them to their underlying index.

Nasdaq 100 Index

The Nasdaq 100® Index consists of 100 of the largest national and international non-finance companies listed on the Nasdaq Stock Exchange, based on market cap. The index is heavily inclined towards large-cap tech companies and is often looked upon as a proxy to the tech sector’s performance. It offers a great combination of large-cap, growth, and tech exposure with high liquidity.

Motilal Oswal Nasdaq 100 ETF

MOFN100 is an open-ended Index Exchange Traded Fund that seeks investment return that corresponds (before fees and expenses) generally to the performance of the NASDAQ-100 Index, subject to tracking. The fund is domiciled in India and Indian residents can invest in INR.

Invesco QQQ ETF

Invesco QQQ tracks the Nasdaq 100® Index performance. QQQ or ‘cubes’ or ‘triple-Qs’ is among the most traded and popular ETFs across the globe. The fund is domiciled in the US, and available to invest directly on the Nasdaq exchange.

Investing in Motilal Oswal Nasdaq 100 vs Invesco QQQ

MOFN100 would have been a clear choice for Indian investors a few years ago, given the difficulties and high costs associated with investing overseas. Now, however, Indian residents can open a US stock trading account in minutes with platforms like Winvesta without any significant costs or capital requirements.

Let’s check the pros and cons of investing in one fund vs the other and also compare how your investment would have grown differently between the two.

NAV vs Price

Like mutual funds, ETFs have an End-of-day NAV but are also priced intra-day. An ETF’s market price is that at which the ETF can be purchased or sold during the trading period. The NAV of an ETF is the value of the fund derived using the market price of the underlying securities at the end of the day and is published after some delay after the close of the market. Due to a variety of factors (liquidity, market movements, listing location time differences), the last traded price of an ETF can be at either premium or discount to its daily NAV. The price is provided by the market participants based on their estimation of the various factors. When the last traded price is higher than the NAV, the ETF traded at a ‘premium’. On the other hand, if the last traded price is lower, then it traded at a ‘discount’.

MOFN100 has seen substantial price differences between price and NAV, especially during periods of extreme volatility. This is primarily due to lower liquidity and the time difference of trading. In 2016 for example, the fund saw premiums as high as 17%. The last premium is about 2%. Thus, an investor will have paid 2% higher than the value for buying the ETF.

Source: Motilal Oswal

Compared to that, the Invesco QQQ ETF has insignificant divergence from the benchmark. The premium/discount to Nasdaq-100 has been less than 0.03% for most of the trading days. The massive liquidity of the fund (1000 times that of MOFN100), the ETF can even handle periods of extreme volatility relatively well. Why is this divergence so low? One major reason is that the market-makers of the ETFs ( the big trading desks of investment banks for e.g.), are able to track the market prices live of the NASDAQ 100 and its constituents, and can adjust the price of the ETF’s bid-ask constantly. The much greater liquidity and the larger no. of players (including High-Frequency Traders) help reduce the price mismatch.

Performance Difference

To accurately compare then MOFN100 to the QQQ, we must normalize them to the same currency and also consider the dividend yield. MOFN100 is a total return fund which reinvests the dividends, while QQQ pays out cash dividends. A quick INR-denominated comparison based on 26-May-20 data reveals that in the past 5 years, MOFN100 underperformed Nasdaq-100 (Total Return in INR) by roughly 16%. Around 3% of this is from tax withholding for dividends, making the like-for-like difference as 13%.

QQQ on the other hand has tracked Nasdaq-100 very well barring the 0.2% annual fee. There was thus an almost 12% performance difference between MOFN100 and QQQ in the last 5 years.

Expense Ratio (Annual Fees)

MOFN100 has an expense ratio of 0.54%, whereas Invesco QQQ has an expense ratio of 0.2%. Although the difference seems small, the 0.34% difference would add up for long term investments.

Other Considerations

Investing in US-listed ETFsneeds INR to be converted to USD. This usually would cost between 0.5%-1.5% depending on the bank used, but has been reducing with increasing competition. Taking things in perspective though, this fee is lower than the most recent premium of MOFN100 to NAV. 

Conclusion

For investors looking to get exposure to US markets, getting direct access is not a challenge anymore. Opening a US brokerage account is completely digital with platforms like Winvesta and takes only a few minutes.

While domestically listed funds of US indices improve access to US markets in India, it still has challenges compared to the US-listed ETFs like higher fees, lower performance, and divergence from NAV due to liquidity constraints.

To start investing in ETFs like QQQ, SPY, and hundred of other US stocks with 0 commission, open an account with Winvesta today!