NEW YORK – U.S. investors seeking to make a bet on companies in Kazakhstan or Qatar are becoming help from an exchange-traded funds industry that\’s increasingly adding single-country ETFs to their offerings.
Some 30 new single-country ETFs found market last year focusing on markets which range from the United Arab Emirates to South Korea and China. Which brings the total to 202 single-country ETFs with $97.2 billion assets in the United States, more than double the amount number of funds that existed 5 years ago. Dozens more – including one targeted at Kazakhstan – are in registration using the U.S. Securities and Exchange Commission.
Darshan Bhatt, chief investment officer of Jersey City, New Jersey-based Glovista Investments LLC, which manages about US$1.1 billion, picked Vietnam like a good place to take a position, based on its growth potential. This past year, Bhatt bought shares in the Market Vectors Vietnam ETF.
Related
- How investors can kill Fed rate hike risk with ETFsInvestors are snapping up ETFs that hedge against currency swingsJonathan Chevreau: Where are the \’robo-like\’ global balanced ETFs within the Canadian market?
\”It\’s important for us to have these single country funds,\” said Bhatt, whose firm runs a method that seeks to outperform the MSCI Emerging Markets benchmark index, which can involve turning to \”off benchmark\” nations like Vietnam they favour.
The fund includes Vietnamese companies including food processing firm Masan Group Corp, property conglomerate Vingroup and Sacombank.
Still, concentrating on a single market overseas can carry risks as well as monitoring. Government restrictions can limit the supply of securities available to U.S. fund managers, and the funds\’ pricing could be unpredictable simply because they can trade all day on U.S. exchanges as the markets they track are closed.
As a result, the ETF prices don\’t always match the need for their underlying assets, because they do in traditional mutual funds that price daily. Single country ETFs often sell at whether discount or perhaps a premium, and they can hit unwary investors.
The average maximum premium for those single-country ETFs was 3.2%, while the average maximum discount was -2.9%, on the 12-month period, based on a Reuters analysis of data provided by ETF.com. In comparison, the maximum premium at the SPDR S&P 500 ETF, a significant U.S. domestic ETF, was 0.14% and its maximum discount was -0.08%.
THE PREMIUM-DISCOUNT CONUNDRUM
Premium and discount trading in international ETFs may be the result of a simple timing issue. Once an overseas market closes, say Japan, the need for the underlying Japanese assets stay, while the U.S.-listed ETF keeps trading. This means that for most of the U.S. trading day, the U.S.-listed Japanese ETF is trading according to expectations of methods the underlying marketplace is going to carry out the next day.
\”As your day goes on, the web asset value (NAV) gets increasingly more stale,\” said David Garff, president of Walnut Creek, California-based Accuvest Global Advisors, which invests in a range of country ETFs.
A 1 or 2% premium or discount is not alarming on the typical trading day, but an unexpected economic policy announcement or unforeseen event could make those premiums double or triple, analysts said.
When the Bank of Japan made a surprise announcement on Friday, Oct. 31, last year that it would be expanding its massive stimulus spending, the iShares MSCI Japan ETF spiked to some 6.8% premium on the following Monday, Nov. 3 – a day that Japanese markets were closed for a national holiday.
PLAYING, OR PAYING, THE PRICE
Investors can take advantage of those price divergences, by using discounts as possibilities to buy into markets they like anyway, Glovista Investments\’ Bhatt said. But unaware investors may get stuck paying reasonably limited for an ETF without understanding that they are doing so.
One afternoon last year, for example, Bank of America Merrill Lynch received an order for $1 million worth of shares of the iShares MSCI Japan ETF, at $12 a share – a price that included a 2% premium because investors were expecting Japanese shares to increase overnight.
Japanese stocks did rise but the ETF did not move up with it – that bump had recently been priced in by U.S. buyers. \”We had to explain that the ETF was projecting the premium already,\” said Sanjay Chablaney, director of ETF trading at BofA, in a conference.
U.S. investors also need to consider foreign exchange rates because of the stronger dollar, which could cut into total returns generated in weaker local currencies abroad.
Investors happen to be turning to currency hedged ETFs, which strip out the effect of the region\’s currency around the performance of the given fund.
The difference could be substantial. The iShares Currency Hedged MSCI Germany ETF, for example, has had a 22% YTD return so far in 2015, over a 7% YTD return for that unhedged iShares MSCI Germany ETF.
CHOOSING COUNTRIES
Government restrictions in overseas markets, such as taxes or limits for offshore investors, can also add a layer of uncertainty to single-country funds as they can create a prolonged duration of trading confined. That\’s because a surge in investor demand in an ETF that may only create a limited number of shares each day may cause a fund to diverge from the true value of its underlying assets.
Deutsche Bank AG, for instance, had to limit creations in its China A-Shares ETF late this past year after nearly maxing out on its government-issued quota, which caused the fund to trade at a fairly consistent premium of several%age points for most of late this past year before reaching a maximum of 7.2% premium in December. It last traded at just under a 1% premium.
Because these price disparities could be extreme and since certain markets are not liquid enough, investors shouldn\’t count on every single-country ETF in the pipeline making it to market. Van Eck Global, one of the largest U.S. providers of single country funds, has had a Saudi Arabia ETF in filing since 2012. But with tight Saudi restrictions on foreign investments that limit access to U.S. fund managers, they haven\’t yet yet had the opportunity to receive the go-ahead from U.S. regulators.
\”We are just ready and waiting,\” said Van Eck Global\’s ETF product manager Amrita Bagaria. \”A lot of people believe the Saudi market will finally be open to foreign investors sometime this season.\”
? Thomson Reuters 2015
