ETFs vs. Reality: The Hidden Mispricing Trap Indian Investors Miss

Introduction

ETFs often get introduced as the perfect investing tool: simple, low-cost and safe.
They track an index or a commodity, trade just like stocks and offer full transparency.

But there’s one dangerous assumption many Indian investors still make:

ETF price always equals its NAV.
It sounds logical. But it’s not true.

And when this illusion breaks, it can lead to unexpected, and often painful, losses.

The truth is:
ETFs can and do trade at premiums or discounts to their actual Net Asset Value.
And during emotional or panic-driven market phases, ETF prices can drift far away from reality.

Two recent incidents in India show exactly why this risk cannot be ignored.

Indian Case Study 1: The Silver ETF Crash, October 2025

Mid-October 2025:
Silver ETFs like Silver bees and ICICI Silver ETF suddenly crashed nearly 21% in just one week.

But here’s the shocker:
Silver prices in the real world didn’t fall that much.

So what went wrong?

For months, retail demand for silver was soaring.
ETF prices had quietly risen 12–15% above their NAV, a massive hidden premium.

Most buyers had no idea.
They simply assumed ETF price = silver price.

When demand cooled, those premiums evaporated.
ETF prices snapped back to NAV, and fell harder than the metal itself.

Who suffered the most?
Investors who bought physical silver saw minor losses.

But ETF buyers faced double damage:
First when silver fell
And again when the premium collapsed

The metal didn’t fail.
The illusion did.

Indian Case Study 2: Nifty ETF Mispricing, Election Week 2024

During the week leading up to the 2024 general election results, the market turned jittery.
Panic selling began across the board.

Top ETFs like:
– NIFTYBEES
– SBI Nifty 50 ETF
– UTI Nifty ETF
…started trading far away from their NAVs, even though the Nifty index itself hadn’t moved that sharply.

Why did this happen?
Too many sellers
Too few buyers
Market makers stepped away temporarily
Liquidity dried up during extreme volatility

The result?
ETF sellers took heavier losses than investors in Nifty index funds, even though both track the same index.

The index was relatively stable.
The ETF price wasn’t.

Fundamentals stayed intact.
Liquidity did the damage.

The Basic Truth: ETFs Are Market-Based Instruments

An ETF’s price is driven by:

• Demand & supply
• Trading volume
• Market maker activity
• Fear, greed, and general market sentiment

NAV tells you the value.
Price tells you the behaviour.

Mispricing happens when behaviour overpowers value.

Key Takeaways for Indian Investors

• ETFs are powerful tools but pricing errors are real.
• Buying an ETF at a premium is an invisible loss.
• Selling during panic can be self-inflicted damage.
• Index funds often protect long-term investors better during volatility.
• Low liquidity + high emotions = unreliable ETF pricing.
• Calm markets bring efficiency. Chaos destroys it.

Conclusion
ETFs aren’t risky.
They’re just misunderstood.

They work beautifully when markets are stable and liquid.
But when fear takes over, or trading dries up, ETF prices can disconnect from reality.

The message for Indian investors is simple:

• Don’t just look at the ETF price.
• Always track the NAV.

When liquidity disappears, efficiency disappears with it.