In the wake of a series of unexpectedly favorable policies, both the A-share and Hong Kong stock markets have entered a state of fervent activity, firing up investors' enthusiasm for bullish tradingThis vibrant market sentiment peaked on October 2, the first trading day after the National Day celebrations in Hong Kong, with significant gains across major indicesNotably, the Southern Eastern Technology Innovation Board 50 Index ETF surged by an astonishing 234%, prompting fund companies to issue urgent risk warnings.
As highlighted by reporters from the China Fund, the momentum in the A-share market following its rebound starting September 24 has led to a rampant interest in ETFs as a tool for capitalizing on this excitementHowever, with this fervor comes a cautionary flag, as excessive enthusiasm has resulted in many ETFs trading at a premium, pushing fund managers to rapidly disseminate warnings about the associated risks
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Remarkably, since the beginning of this uptick, there have been 25 warnings issued regarding the risks of ETF premiums, and some ETFs have seen premiums exceeding 10%.
Industry experts caution that engaging in high-premium purchases can expose investors to risks such as a decline in premiums and volatility in underlying assetsThey suggest that regular investors adopt a rational approach and carefully select products based on their risk tolerance during this market frenzy.
The Southern Eastern Technology Innovation Board 50 Index ETF was a case in point, witnessing a dizzying rise of 234% within a single trading sessionSuch unprecedented activity on October 2 saw the Hang Seng Technology Index climbing by over 10%, closing at an 8.91% gain, even while the A-share market remained closedETFs that tracked A-share indices became the focal point of capital inflows, with the Southern Eastern ETF experiencing its momentous escalations.
In response to the extreme fluctuations, fund managers were compelled to release urgent announcements alerting shareholders to the trading risks in this volatile market, underscoring concerns about the steep premiums in the secondary market prices
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As of September 30, the net asset value per share for the ETF was recorded at 7.4243 Renminbi, with managers urging caution among investors, especially given that the domestic securities market was on holiday.
Following this alert, the exuberance of the Southern Eastern ETF notably retreated, ending the session with a still impressive gain of 30.05%. Despite the risk warnings, the ETF craze continues to captivate the market, leading to a series of premium risk alerts from various funds since the end of September.
For instance, on September 30 alone, a number of ETFs, including the GF CSI 500 ETF, issued warnings regarding high premiums, with some even announcing temporary suspensions of tradingFollowing suit, other products such as the Puyin Anxin CSI Hong Kong-Shenzhen Game and Cultural Media ETF and the Guolian An CSI Consumer 50 ETF also flagged premium risks.
The announcements from Puyin Anxin emphasized the importance of paying close attention to daily references of fund net values, urging investors to be wary of the potential for substantial losses if they act without proper caution.
This surge in ETF premiums represents a rather rare phenomenon, driven by the broader excitement in the market
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According to data from Wind, as of September 30, over 342 stock ETFs exhibited premiums above 1%, while 33 products had premiums exceeding 5%. High premiums were particularly noted among the US-listed Chinese concept ETFs and other corresponding funds.
The market has indeed shown significant performance enhancements due to cascading favorable policies fueling A-share volatility, with ETFs emerging as the favored instruments of premium tradingSince September 24, nearly 800 stock ETFs have seen gains, with 65 ETFs soaring more than 40% within just five daysThe BoShi BOCI Growth ETF, for example, recorded an impressive gain of 58.07% during this period.
The overall landscape suggests heightened risks associated with purchasing at inflated premiumsNotably, throughout the year, a variety of Qualified Domestic Institutional Investor (QDII) ETFs have also experienced similar premium phenomena, with fund managers frequently warned regarding potential market instabilities related to these premiums.
One salient feature of ETFs is their dual trading framework, allowing transactions on both primary (where they are created or redeemed) and secondary markets (trading on exchanges). These two distinct pricing mechanisms often lead to variances in the perceived market price of a single product across both platforms.
In the primary market, the pricing reflects the Indicative Optimized Portfolio Value (IOPV), which is derived from the real-time value of the underlying securities held by the ETF
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Conversely, the secondary market represents the actual trading pricesDue to fluctuating supply and demand dynamics, the trading prices for ETFs can diverge from their estimated net asset values.
As stated by Huaxia Fund, variances often occur when buy orders outnumber sell orders, leading to a premium, and vice versaThe difference in trading price versus net value can express a significant premium or discount that traders seek to capitalize on for arbitrage opportunities.
However, with the rise of premiums come critical trading risks as the premium rate starts to normalizeHigh demand may inflate prices, yet as enthusiasm wanes, values tend to regressConsequently, buying at peak premiums positions investors to pay a markup on intrinsic valueIf buying activity diminishes or if supply increases, the premium may decrease, resulting in potential losses for those who entered the market at elevated levels
