© Reuters. FILE PHOTO: A safety guard stands on the Shanghai Stock Exchange constructing on the Pudong monetary district in Shanghai, China, because the nation is hit by an outbreak of a brand new coronavirus, February 3, 2020. REUTERS/Aly Song/File Photo
SHANGHAI (Reuters) – A Shanghai-listed fund that holds U.S. shares took the bizarre step of suspending buying and selling on Friday, saying it was crucial to guard traders after costs hit file ranges in a scramble for abroad belongings.
Trading within the exchange-traded fund (ETF) that tracks the MSCI USA 50 Index was halted for the afternoon session, after a one-hour suspension within the morning failed to scale back hefty worth premiums.
“We caution investors of the risks in the secondary market price premiums,” the ETF’s supervisor, E Fund Management Co mentioned in an announcement. “Investors who invest blindly could suffer major losses.”
ETFs commerce like shares on exchanges, with costs decided by provide and demand, but additionally tethered to their web asset worth (NAV). This week, the worth premiums of China-listed ETFs that spend money on abroad markets, such because the United States and Japan, surged to file highs as Chinese shares plunged.
The E Fund MSCI USA 50 Index ETF final traded at 1.52 yuan ($0.2117) on Friday, 43% greater than its NAV of 1.07 yuan.
Typically, such premiums would set off arbitrage actions whereby the ETF supervisor points extra fund shares within the main market till the worth hole vanishes.
But such a mechanism doesn’t work for outbound ETFs in China, the place capital controls limit abroad funding.
“Secondary ETF prices … are affected by supply and demand, and subject to systematic and liquidity risks, so investors could face potential losses,” mentioned E Fund Management, which has repeatedly warned traders of the dangers this week.
($1 = 7.1788 renminbi)