An Interesting Development With India Funds 15 comments
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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.
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This article has 15 comments:
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
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.
By the way, I was able to place a short order (testwise) through Interactive Brokers without any problems.
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.
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.
Maybe I'll try again and wait for the execution.
Today I again placed a short order with Interactive Brokers. The order was accepted immediately and executed at the limit price.