Asia is a tail-ender in exchange-traded funds (ETFs), but with its diversity of marketplaces, there could be opportunities for traders.
Just US$1.3 billion trades per day in Asian ETFs. The Asian ETF market currently stands at US$112 billion in size. In comparison, the US market for ETFs is just over ten times as big.
Khaleel Mohideen, managing director of equities at Credit Suisse in Hong Kong explains how traders in Asia can use ETFs in a report titled ‘How to trade Asian ETFs’
Reasons for the low volumes include regulatory concerns and restrictions, ID markets, and fragmentation across 18 Asian exchanges and multiple currencies.
Globally listed ETFs usually trade at higher premium/discount from an ETF’s net asset value during Asian hours
According to Credit Suisse, “This is because the Asian indexes returns are calculated using local closing prices while those globally-listed ETFs continue to trade through US or Europe market hours. Real-time information flow could affect the stocks that the ETF tracks even though the underlying stocks have already closed.”
Trading that global listed ETF during the underlying market time zone can lower premiums/discounts to the ETF’s fair value.
Investor demand can also cause an ETF to trade at a premium or discount to net asset value. Arbitrageurs exploit this and that act keeps disparities to a minimum. An arbitrageur can gather up ETF shares, exchange them for the underlying stocks and sell the stocks for a profit. He does the opposite for ETFs that are trading at premium.
Another strategy used by arbitrageurs occurs when globally listed ETFs with Asian underlying trade at a premium due to real time news flow or sentiment. The trader can then sell the US listed or Europe listed ETF on the exchange and buy back when Asia opens.
About 37% of Asian ETFs cover Japan and Hong Kong/China markets accounting for 17%. Asia’s ETFs comprise of a mix of physical and swap-based products.
The liquidity of an ETF is effectively the liquidity of the underlying securities and cannot be assessed on trading volume and much less on exchange-displayed trading volume. Authorized Participants, such as the major brokerage houses have the ability to effectively create, (or redeem) shares of the ETF on the spot by just assembling the underlying basket.