• Savings Directions
• October 30, 2024

Multiple Cross-Border ETFs Plunge in Late Trading

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In the complex world of finance, the allure of high returns often comes hand in hand with substantial risks, and nowhere is this more evident than in the trading of ETFs (Exchange-Traded Funds). On January 10, 2025, just before the close of trading, a significant decline was witnessed in several high-premium cross-border ETFs, prompting swift reactions from various fund companiesSouthern Fund, Invesco Great Wall Fund, Guotai Asset Management, and Harvest Fund all announced the suspension of trading for select high-premium ETFs, effective from the start of trading on that dayThe resumption of trading would be communicated at a later date, demonstrating a cautious approach in turbulent times.

Adding to the growing concerns, by noon on the same day, companies including China Universal Asset Management, America Funds, and Huatai-Pb Asset Management issued alerts regarding the premium risks associated with ten distinct cross-border ETFs under their management

These warnings were crucial as they came at a time when the enthusiasm surrounding certain investment opportunities had created a volatile environment.

Southern Fund elaborated on the situation, explaining that in addition to the conventional risks related to the change in the net asset value of funds, the trading prices of cross-border ETFs on the secondary market are influenced by a myriad of complex factors including supply and demand, systemic risk, and liquidity riskA premium occurs when the trading price of a cross-border ETF exceeds its net asset valueThe fundamental market principle suggests that, over time, trading prices for these ETFs typically converge back to their intrinsic valuesTherefore, when these discrepancies become pronounced, investors must remain vigilant to avert potential losses from an impulsive follow-the-crowd mentality.

The alarming drop in high-premium ETFs late on that fateful day further illustrated the risks inherent in this investment sphere

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For instance, the Southern Dongying FTSE Asia Pacific Low Carbon Selected ETF saw a remarkable increase of over 7% during trading, only to plummet by 5% at the close, having dropped a stunning 12% at one point during the sessionSimilarly, the China Universal S&P 500 ETF recorded gains exceeding 8% before finishing down by 3.56%, an overall drop of over 11% during the trading dayThe Huatai-Pb Saudi ETF also experienced a significant decline, reflecting the volatility affecting the sector.

As part of their proactive stance, multiple fund companies issued notices about suspending certain cross-border ETFs that were trading at high premiums as a protective measure for investorsOn the eve of this downturn, Invesco Great Wall Fund Management Co., Ltdreleased an announcement cautioning investors about the substantial premiums observed in the secondary market trading prices of their funds

Particularly, the Invesco Great Wall S&P Consumer Selected Index Securities Investment Fund (QDII) had been trading noticeably above its reference net asset value, raising significant concerns about the sustainability of such pricing.

Market analysts, like Cui Yue from Morningstar (China), offered insights into the situation, explaining that the drop in multiple cross-border ETFs represents a cascading effect resulting from high premium tradingTypically, the arbitrage mechanism between the primary and secondary markets allows for the correction of pricing disparities in the short termHowever, with cross-border ETFs, the redeemable capital is often constrained due to foreign investment quotas, particularly for QDII productsThis restriction creates a bottleneck wherein the supply from new purchases fails to keep pace with the elevated demand in the secondary market, thus perpetuating high premiums

Investors, taking advantage of the current fervor for overseas investments, might have rushed in to capitalize on these premiums, fully aware that such pricing is unlikely to remain inflated.

Moreover, the announcements made by these fund companies regarding suspensions and risk warnings serve as alarms meant to nudge apprehensive investors toward prudenceAs articulated by Wang Tieniu, the director of the Jiaan Jinxin Fund Evaluation Center, the primary reason behind the suspension of high-premium ETFs is to safeguard the interests of investors and maintain order within the marketThe striking price differentials observed often stem from short-term irrational behaviors, such as heightened market sentiments and speculative buying.

Liquidity risk remains a major concern within the cross-border ETF marketThe persistent and climbing premiums are tied closely to surging market demand and exuberance

The recent upticks in cross-border ETF transactions have seen floodgates open, with funds pouring into these investment vehicles, causing various products to skyrocket in valueETFs do offer day trading features (T+0), allowing traders to easily capitalize on these fluctuations, thus driving up the turnover rates of smaller cross-border funds.

Data from Wind, a financial data provider, highlighted significant trading volumes: on January 9, the Harvest German DAX ETF reached a turnover rate of 1813.5%, while the Southern Fund's Southern Dongying Saudi Arabia ETF reported a turnover of 1156.63%. Meanwhile, the Invesco Great Wall S&P Consumer Selected ETF exhibited a turnover of 902.09%. Such astounding statistics paint a picture of a rapidly changing investment landscape where volatility reigns supreme.

Furthermore, Wang Tieniu stressed the importance of being mindful of existing macroeconomic policies, escalating geopolitical conflicts, and unpredictable shifts in global exchange rates when investing in overseas ETFs

The general small scale of cross-border ETFs can exacerbate liquidity risk during periods of considerable market volatility, hindering investors’ abilities to transact effectively.

When considering the inherent volatility of the cross-border ETF market, it's crucial to understand that trading prices will ultimately revert to their intrinsic valuesTherefore, if investors find themselves caught in a high-premium trading situation, they must remain alert, steering clear of rash decisions that could lead to severe financial lossesAccording to Cui Yue, investors need to heed two principal warnings: first, the risk that premiums will inevitably return to net asset value levels, meaning those purchasing at inflated rates may face significant losses when corrections occurSecondly, if market sentiment shifts suddenly, such as with drastic declines in late trading sessions, the inherent value of ETFs may experience sharp drops, impacting those who bought at high prices.

In summary, the intertwining of enthusiasm for trading, the quicksilver nature of market dynamics, and the built-in risks of high-premium ETFs illuminate the complexities that investors must navigate in pursuit of returns