In recent months, cross-border exchange-traded funds (ETFs) have been experiencing significant price surges, often leading to substantial premiums over their net asset values (NAVs). This spike in interest and investment has caught the attention of fund companies, which have begun issuing regular warnings about the risks associated with such high premiumsOn a particularly volatile day, the number of products that received premium risk alerts exceeded thirty, signaling a growing concern in the financial markets.
On January 9th, two notable ETFs—the S&P Consumer ETF and the Southern Saudi ETF—reached their daily limit ups, exhibiting an impressive rise alongside others like the Harvest Germany ETF and Asia Pacific Select ETF, both of which reported gains exceeding 9%. Other funds, such as the Huatai-PB Saudi ETF and the Huaan Germany ETF, also saw significant increases of 7.62% and 4.02% respectivelySuch extreme movements in the ETF market are relatively rare, especially considering the overall turbulence present in global equity markets since the beginning of the year.
For context, traditional equity indices such as the German DAX and the S&P 500 have only gained 2.04% and 0.62% respectively this yearIn stark contrast, the cross-border ETFs traded in Chinese markets, like the aforementioned S&P Consumer ETF and Southern Saudi ETF, have seen their values soar by over 20%. This illustrates a decoupled trajectory from traditional markets, as these funds seem to be resonating well with investors despite broader market stagnation.
The activity in the cross-border ETF space is attributed largely to a flood of capital entering these productsObservations from the secondary market reveal that the trading volumes for the S&P Consumer ETF and Southern Saudi ETF on January 9th reached staggering amounts of ¥5.699 billion and ¥4.524 billion, making them the top two equity ETFs in China by transaction volume for that day.
It is crucial to note that many of the ETFs currently undergoing extreme price behaviors are relatively small in size
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The Harvest Germany ETF, Southern Saudi ETF, and S&P Consumer ETF hold approximately ¥117 million, ¥323 million, and ¥435 million in assets, respectivelyThe T+0 trading feature of cross-border ETFs encourages day trading, causing many investors to engage heavily in the secondary market, which in turn has inflated the turnover rates of these smaller fundsFor instance, on January 9th, the turnover rate for the Harvest Germany ETF reached an astonishing 18.3 times, showcasing an unprecedented level of trading activity.
The premium rates for these cross-border ETFs have become particularly notable, with data indicating that 28 ETFs are currently trading at premiums exceeding 5%, and seven of those have surpassed 10%. The S&P Consumer ETF leads the pack with a staggering premium rate of 51.82%, indicating that its market trading price is over 51% higher than its NAVLaunched in January 2024, this ETF recorded a substantial positive return of 26% last year, making it one of the top performers in the marketHowever, it has consistently traded at a premium, with rates now expanding further.
Another critical point of concern is the Southern Saudi ETF, which also boasts a premium exceeding 20%, with year-to-date gains surpassing 20%. However, its NAV increased by merely 0.4% this year, suggesting a stark discrepancy that heightens the risk of a price correction in the secondary marketThis trend of inflated premiums threatens to create sharp and potentially damaging price corrections for investors caught on the wrong side of the trade.
One underlying factor contributing to these elevated premiums is the foreign exchange quotas that limit the amount of offshore investment available to individual investorsThis often results in caps or moratoriums on purchases of certain cross-border ETFs, making it difficult for investors to capitalize on market inefficiencies that might alleviate such premiums
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This limitation has led to many companies issuing frequent alerts regarding premium risks, even as various ETFs remain significantly overpriced.'
As Chinese citizens continue to diversify their asset allocations with a keen interest in increasing their overseas investments, the limitations imposed by foreign exchange quotas mean that many cross-border ETFs must halt off-market purchases once their quotas are reachedThis has led to discrepancies wherein the market prices of domestic ETFs exceed their respective offshore NAVs, further propelling the premiums higherThe consequence is that substantial amounts of capital flow into these ETFs, despite the warnings surrounding premium risks.
Moreover, factors like time zone differences and fluctuations in exchange rates contribute to discrepancies between QDII fund NAVs and their market trading prices, sometimes resulting in either undervaluation or overvaluation of these fundsAs the market navigates these complexities, industry experts are advising cautionThey warn against the impulse to engage in short-term trading of ETFs, particularly in the cross-border sector.
Financial professionals emphasize that large-scale investments should consider aspects such as fund size and liquidity to avoid creating drastic price swings in the secondary marketThe issuance of warning announcements related to premium risks has become increasingly common among fund companiesFor instance, on January 9th, multiple fund companies released notices about premium risks, including alerts that some funds would temporarily cease trading for specific parts of the day.
On January 8th, a wide range of cross-border ETFs, including the Invesco Great Wall S&P Consumer ETF, Harvest Nasdaq Index ETF, Southern Saudi ETF, Huaxia S&P ETF, Nasdaq ETF from E-Fund, and the Harvest S&P Oil and Gas ETF, issued similar premium risk alerts
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