ETFs See Widespread Premiums, Fund Firms Warn of Risks
On October 8th, the A-share market remained strong, with funds entering the market through ETFs to seize shares, leading to a batch of ETFs hitting their upper limit. By the close, 77 ETFs experienced a "20% upper limit"; several ETFs saw significant premiums, with 5 ETFs having a premium rate exceeding 10%.
ETF premiums are one of the market sentiment indicators. Industry insiders have indicated that, currently, the market is expected to enter a period of consolidation after a sharp short-term rise. Looking at a longer time frame, the current stock indices are still relatively low, making it a good time to allocate equity assets. In conjunction with the recent rapid rise in the index, carefully selecting industries and related ETFs may be an effective strategy.
Several ETFs saw significant premiums. By the close, all 77 ETFs that hit the "20% upper limit" were "Dual Innovation" themed ETFs, including the ChiNext Growth ETF, ChiNext Large Cap ETF, Sci-Tech Innovation Materials ETF, Dual Innovation ETF, Sci-Tech Innovation Board 50 ETF Fund, and Dual Innovation 50 ETF, among others.
In the booming market, the secondary market prices of ETFs were significantly influenced by the funds seizing shares, leading to a substantial deviation from the indicative optimized portfolio value (IOPV), resulting in significant premiums for several ETFs. By the close on October 8th, the premium rate of BOCI ChiNext ETF was nearly 14%, and the premium rates of Sci-Tech Innovation ETF, ChiNext Large Cap ETF, Sci-Tech Innovation 100 ETF Enhanced, and Ping An ChiNext ETF were all above 10%.
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Before the market opened on October 8th, fund companies announced warnings about ETF premium risks. Nanfang Fund announced that the secondary market trading price of its real estate ETF was significantly higher than the indicative optimized portfolio value, resulting in a substantial premium. Investors were warned to pay attention to the premium risk in secondary market trading prices, and blind investment could lead to significant losses.
In addition, several ETFs such as the Consumer ETF Shanghai-Hong Kong-Shenzhen, Education ETF, Consumer ETF Leaders, and other ETFs, as well as on-exchange products like CITIC-Prudential Cyclical LOF, Sci-Tech Innovation Board Fund, 1000 Enhanced LOF, Huitianfu CSI 500 Index (LOF) A, and Baijiu Fund LOF, issued warnings about premium risks.
The premium risk is worth noting. An ETF premium means that its market price is higher than its intrinsic value (usually measured by the indicative optimized portfolio value IOPV). For example, if an ETF's IOPV is 1 yuan, but the market price reaches 1.1 yuan, this results in a 10% premium. This price deviation may cause investors to pay too high a price when purchasing. If investors buy ETFs at a premium, they may face losses when the premium disappears (i.e., when the market price returns to near the IOPV).
Regarding the risks of significant ETF premiums, a senior industry insider stated that high premiums could attract arbitrageurs to enter the market. When a large number of arbitrageurs attempt to arbitrage through the subscription and redemption mechanism, if market liquidity is insufficient, it could lead to significant fluctuations in ETF trading prices. "For example, when market liquidity is poor, arbitrageurs selling a large number of premium ETF shares could cause the ETF price to drop rapidly, causing losses to other investors," he said.Additionally, the aforementioned senior industry insiders stated that the goal of ETFs is to closely track specific indices. When a premium occurs, it may affect their tracking performance. Due to the inflow or outflow of substantial funds into or out of the ETF caused by the premium, fund managers may not be able to adjust the portfolio in a timely manner to accurately track the index, thereby increasing the tracking error.
Premium Reflects Market Sentiment
In fact, the premium situation of ETFs can serve as a barometer of market sentiment. "A higher premium may reflect the optimistic sentiment of market participants towards the index or related assets that the ETF tracks. For example, when a high premium appears in an industry ETF, it may mean that the market has a more favorable view of the industry's future development prospects. Investors can use the premium situation of ETFs as a reference, in conjunction with other market analysis tools, to judge market trends and investment opportunities," said an index fund manager.
For the upcoming market, Guo Jiting, fund manager at Nuode Fund, stated that considering the market has undergone a long period of adjustment, although the market has recently shown a strong rebound, looking at a longer timeframe, the current stock index is still in a relatively low position, making it a good time to allocate equity assets.
Manulife Fund expressed that with subsequent policies being introduced one after another, the market's strong trend is expected to continue, and the valuation repair of related varieties can be anticipated, but it is expected that fluctuations will significantly increase. Subsequently, it is necessary to track factors such as the strength of domestic economic fundamentals repair and overseas geopolitical situations to assess the sustainability of the market trend.
Regarding how to operate in a rapidly rising market, Guo Jiting stated that the index has risen quickly recently, and carefully selecting industries and individual stocks may be a more effective response strategy. In conjunction with the previously disclosed financial reports of listed companies and the actual economic situation, this year's performance "visibility" is relatively clearer, and the performance outlook for some listed companies next year is also relatively clear. Subsequently, three types of industries can be focused on: first, policy-supported industries that may have some improvement in their fundamentals, such as non-bank finance and real estate chain policy beneficiaries; second, technology-driven industries that may have relatively stable growth, such as computer, electronics, and power equipment technology varieties; third, varieties that have adjusted significantly before, have a reasonable dividend rate, and still have some growth in their performance, such as consumer goods and pharmaceuticals.
Manulife Fund stated that judging from the recent dense introduction of various policies, investors can actively pay attention to cyclical sectors, such as finance, real estate, consumer directions, and some technology stocks, as well as upstream resource products.