The A-share market has experienced a rollercoaster beginning from mid-2024, with its movements reflecting an ongoing struggle within the financial landscapeRecently, one of the most talked-about phenomena has been the high premiums attached to cross-border exchange-traded funds (ETFs). Various ETFs, from those tracking the Nasdaq to those focusing on consumer stocks within the S&P index, have seen significant appreciation in value, pulling speculative funds and continuously surprising market observers with their persistent premium rates and liquidity levels.
As the week came to a close on January 17, 2024, cross-border ETFs remained the center of attentionOf the 138 ETFs available in this category, an astonishing 68 recorded a premium or discount rate exceeding 1%. Investors, particularly those using margin trading, made net purchases of 222 ETF products throughout the week, allocating over ¥100 million to four specific ETFs alone
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This heightened level of investment activity undoubtedly signals a strategic shift in investor sentiment towards ETFs, revealing much about the broader market dynamics at play.
The behavior of the ETF market has demonstrated a stark divergence in performanceWhile there was a prior trend of widespread increases across various funds, recent weeks have shown a more pronounced bifurcationFor example, two S&P oil and gas ETFs have surged by around 14%, with trading volumes surpassing 3000% throughout the weekThis uptick aligns closely with rebounding international oil prices, attributed to speculative traders increasing their net long positions in the oil marketIn contrast, funds that previously attracted substantial investor interest, such as the S&P consumer ETF, witnessed a decline of 7.32%, reflecting volatility in market sentiment.
The disparity in premium rates has also become increasingly evident
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While U.S.-related ETFs have been trading at remarkable premiums—with one S&P oil and gas ETF reflecting a premium rate of 15%—a notable development arose when the S&P consumer ETF hit an alarming premium of nearly 40% on January 16. Following this, a risk warning was issued, and trading was suspended temporarilyThis sharp contrast with Hong Kong stock-related ETFs, which broadly trade at discounts, further underscores the evolving challenges within the cross-border ETF marketFor instance, of the 57 ETFs selling at a discount, 56 pertained to Hong Kong stocks, with several achieving discounts exceeding 1%.
Examining financing trends, data from Wind shows that net buying was heavily skewed toward certain ETFs with significant investment potentialThe Nasdaq 100 ETF was particularly favorable among investors, boasting a net purchase amount of ¥227 million, while the broader category saw substantial investment in various key products.
The remarkable fluctuation of ETFs can be traced through a range of indicators such as increase rates, transaction volumes, turnover, and premium rates
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This clustering of speculative funds has fueled discussions regarding the failure of arbitrage mechanisms designed to stabilize ETF pricingThe ETF marketplace is particularly sensitive to these fluctuations, which can often lead to mispricing and irrational trading behaviorNonetheless, the surge in ETF premiums remains shockingly persistent, with the Nasdaq Technology ETF shifting from its previous star status to its recent replacement by the S&P Consumer ETF as the most sought-after investment for risk-seeking traders.
The narrative around “disruption” raises vital questions about the direction of cross-border ETFsWith nearly 49.28% of the 138 ETFs exhibiting premium or discount rates outside the 1% range, market analysts are concerned about this significant deviation from expected behaviorTypically, the arbitrage mechanism in place is meant to mitigate such discrepancies, effectively correcting the ETF prices back to net asset values
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Yet, within cross-border ETFs, this mechanism has appeared to falter, prompting questions about the future outlook of such investmentsWhy is there a willingness for substantial speculation in an environment where price discrepancies are so pronounced?
According to insights from a seasoned, anonymous ETF fund manager, the allure of the U.Smarkets lies in their recent performance, which continues to yield profits with manageable volatilityThis, combined with a growing tendency for Chinese investors to seek out overseas market exposure via ETFs, contributes to the sustained demand that keeps premiums inflatedHowever, the practical limitations imposed by the Qualified Domestic Institutional Investor (QDII) program complicate matters, restricting purchasing capacity of funds primarily aimed at foreign investments and necessitating currency exchanges that impose limits on operational capacity
As a result, these restrictions perpetuate discrepancies in expected arbitrage profits, allowing premiums to persist despite the theoretical foundational principles governing ETF pricing.
Looking back over the past six months, one must ask whether the distortions in cross-border ETF prices remain justifiableThe contrasting opinions among experts highlight a divide in sentiment about the persistence of high premiumsSome argue that the ongoing high premiums are a rational response to market conditions and expectations that align with the indexes these ETFs trackConversely, numerous investors caution that much of the activity surrounding these ETFs embodies reckless speculation—an echo of “hot potato” games where eventually, someone must face the consequences of inflated prices.
As the A-share market begins to demonstrate signs of recovery, accompanied by the implementation of effective macroeconomic policies, it is likely that the current state of premium inflation surrounding cross-border ETFs will not last indefinitely