An Interesting Development With India Funds

An interesting observation on Barclay’s popular India ETN (INP) versus the previously popular closed-end India Fund (IFN): The natural instinct is to go with a lower cost ETN/ETF versus the closed-end fund. But something unusual is happening. INP has been extraordinarily strong when compared to its underlying index or NAV. In fact, recently INP reached an eye-popping premium of 18% compared to old favorite IFN, which trades at a 10% discount to its NAV.

According to Barclay’s website, through October 31st, INP’s MSCI India Index rose 63.41% YTD while per ETF Connect’s website, IFN’s NAV rose a slightly better 65.13%. Both achieved great performance and over 2007 both INP and IFN have produced similar 75% YTD returns also thru October 31st.

When evaluating major holdings you won’t notice much difference between either. 

As an investor, you might then logically wish to take advantage of the arbitrage opportunity by shorting INP and going long IFN. But, there’s one problem - you can’t. In calls to both Fidelity and ETrade, to name two brokers, there are no INP shares available for shorting and both firms indicated “hard to borrow” conditions would persist. Institutions that the capacity to have more shares issued for their own shorting [50K shares] may start taking advantage of this opportunity.

At the very least, if you’re interested in the India stock market and growth story IFN might offer a better opportunity at this time.

Comments

[Karl Francis:]

David Fry:
I thought that index funds always closely mimic the index. Did you find out how that premium build up and what's the reason?
If such an instrument can trade at a premium, could it also trade at a discount? At least, this is not the idea of an index fund.
Thank you for your contributions

2007 Dec 07 04:58 AM

[granger:]

Thank you.

2007 Dec 07 09:11 AM

[Index Maven:]

INP is now trading like a closed-end fund rather than ETN. Barclays can not issue any more notes due to restrictions by the Indian securities regulator (SEBI). If you go to the Barclays ipath web page and click press release you will see - www.ipathetn.com/pdf/0...
Unfortunately, people are not aware of this and keep buying INP which only serves to increase the premium. Note if SEBI releases this restriction Barclays will immediately issue more notes causing the price to fall. I don't believe SEBI will back off - Barclays will be forced to buy in INP.

2007 Dec 07 09:56 AM

[jct:]

very interesting

2007 Dec 07 11:07 AM

[Karl Francis:]

Thanks for the background information. I just learned the difference between ETN and ETF. INP is just an unsecured debt instrument. People who buy that stuff right now really do not realize that the link to the MSCI India index is broken and that they could buy into the same underlying assets for close to 30% less by buying the IFN, with the added security that investment is backed by real India shares and not only by Barclay's good name.
By the way, I was able to place a short order (testwise) through Interactive Brokers without any problems.

2007 Dec 07 12:04 PM

[Vijay Singal:]

Thank you, ETNMAN. That partly explains why INP is trading at a premium, while IFN/IIF trade at a discount. Investors in INP are clearly doing the wrong thing. But arbitrageurs can't take advantage of the mispricing because there is no telling when INP will begin trading at its NAV.

2007 Dec 07 12:30 PM

[David Fry:]

You're on the money ETNMAN. I received word of this last night after I published my observations and analysis. I should have gone more deeply into the prospectus to catch this update.

Further, I was aware of the crackdown SEBA had "proposed" on foreign fund flows but didn't connect the dots regarding how this might either affect an "index" or a derivative like ETN.

Nevertheless, despite these shortcomings, the situation between IFN and INP remains favoring the former for investors.

Despite an email to Barclay's regarding this situation there has been no response--"dummy up" I guess.

KarlF, you can short anything in a "test" account.

2007 Dec 07 02:47 PM

[Eric Peterson:]

I've been watching very closely this ridiculous rise in the premium for INP for the past couple weeks, up to 20% now. With IFN holding many of the same stocks, and trading at a discount of 10% or so, I decided to place a large arbitrage trade on Wednesday. I called Fidelity to short 3,000 shares (about $300,000) of INP, with the plan of buying $300,000 of IFN if successful in shorting INP. If the 30% spread narrows, to say 20%, that's a nice $30,000 profit with little risk. Doesn't matter if the Indian market goes up or down.

But after talking to two different brokers who in turn talked to the trading desks and short specialists, they told me Fidelity has no INP shares to short. Well, the short interest in INP in September was 14% of the total outstandings shares. Who are the people who are able to short INP? Is it a special privilege given to institutions, and not to "small traders" like me who want to short $300,000? Very mysterious. Fidelity customers must own millions of dollars worth of INP. I can't believe there are none available for shorting.

2007 Dec 07 05:51 PM

[David Fry:]

The short interest was 14% in September but that was before the ban on new shares being issued. One explanation for the current rise could be short covering.

2007 Dec 08 07:24 AM

[David Fry:]

It's interesting the situation got even more stretched yesterday as someone unloaded some blocks in IFN yesterday slamming the stock. In the meantime, INP kept running higher and no doubt expanding the premium.

2007 Dec 08 07:33 AM

[Karl Francis:]

David Fry: I didn't place the short order in a test account, but as a limit order in a real account. It was accepted immediately. With "testwise" I mean that I canceled the order before execution because the exaggeration doesn't seem to have run its course.
Maybe I'll try again and wait for the execution.

2007 Dec 09 05:48 AM

[Karl Francis:]

To conclude the discussion if this stock can be shorted:
Today I again placed a short order with Interactive Brokers. The order was accepted immediately and executed at the limit price.

2007 Dec 10 04:13 PM

[Jamiml:]

IFN is now only at a 4% discount, if that. INP has not moved.

2007 Dec 10 06:52 PM

[hepp2:]

There is a very complete analysis of the spread to NAV and sectorial analysis at indiafund.net

2008 Apr 02 08:44 PM

[hepp2:]

Some of the vagaries and peccadillos of the portfolio managers of these funds are discussed at indiafund.net

2008 Apr 02 09:26 PM