Cross-Border ETFs Boom: $17.4B Influx This Month
The cross-border ETF market is experiencing a resurgence, showcasing a vibrant screen of red markings in an impressive comeback performance. As of July 29, the market has observed that the top 20 ETFs in terms of daily growth are all cross-border products. Leading the charge are well-known indices like the Dow Jones ETF, the Nikkei ETF, and the Nasdaq Technology ETF, alongside the S&P ETF, all demonstrating significant increases.
This revitalization occurs in the wake of a temporary downturn that had dampened market enthusiasm, causing a slight retreat from the prior heightened interest. However, the vigor returned swiftly, with multiple products trading robustly and showing increased turnover rates and trading volumes. There are currently 10 cross-border ETFs exhibiting a premium that exceeds 5%. Notably, the Nasdaq Technology ETF, which had undergone the most considerable pullback, surprisingly maintains the highest premium at over 10%.
Over the past weeks, it appears that some investors, undeterred by the recent corrections, have opted to accelerate their investments. In total, an impressive net inflow of nearly 17.4 billion yuan has flowed into the cross-border ETF market this month. The standout products attracting the most capital include the CMB Nasdaq 100 ETF, the Invesco CSI Hong Kong Internet ETF, and the Harvest Nasdaq 100 ETF, with each garnering inflows exceeding 1 billion yuan.
Industry experts believe that the sustained premium in cross-border ETFs reflects a growing enthusiasm for foreign investments among investors. Despite this, there is a prevailing caution; emotional volatility in market sentiment often leads to eventual corrections, making the maintenance of high premiums unsustainable in the long term. They advise investors to carefully evaluate whether the potential for price increases justifies any premium costs and to avoid purchasing products with excessive premiums whenever possible.
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On July 29, as the three major A-share indices experienced mixed results, the Shanghai Composite Index inched up by 0.03%, while the Shenzhen Component Index and the ChiNext Board fell by 0.96% and 1.44%, respectively. In stark contrast, overseas indices like the Nasdaq Composite and the Nikkei 225 rebounded. This divergence was prominently reflected in the ETF market, where cross-border ETFs significantly dominated the scene.
According to data from Wind, the average daily growth rate of 128 cross-border ETFs stood at 1.17%, overshadowing the 0.65% decline in domestic stock ETFs. All 20 top spots on the daily gainers' list were occupied by cross-border ETFs. The Penghua Dow Jones Industrial Average ETF and the Huaxia Nomura Nikkei 225 ETF saw gains exceeding 4%, recording increases of 4.96% and 4.71%, respectively. Other notable performers included the Invesco Great Wall Nasdaq Technology ETF and the Huaxia S&P 500 ETF, each skyrocketing beyond 3%.
Moreover, trading activity in these products was notably robust, with turnover rates amplifying. For instance, the Penghua Dow Jones Industrial Average ETF experienced a turnover rate of 48.8%, marking an increase of 7.72 percentage points from the previous trading day, while the Huaxia Nomura Nikkei 225 ETF’s turnover rate rose from 26.35% to a striking 43.85%. Both products registered transaction volumes that exceeded 100 million yuan from the prior day.
Amidst the speculative fervor from retail investors, some cross-border ETFs have maintained high trading volumes. The Huaxia Hang Seng Technology ETF reported a trading volume exceeding 2.047 billion yuan on that day, maintaining over 2 billion yuan in volume for the eighth consecutive trading session. Additionally, seven other ETFs, including the Huaxia Hang Seng Internet Technology ETF and the Invesco Great Wall Nasdaq Technology ETF, recorded trading volumes above 1 billion yuan each.
Just two weeks prior, however, many cross-border ETFs had slumped into a phase of oscillating downward trends, with only two out of the 128 products registering positive returns. Data from Wind indicated that in the two weeks leading up to July 26, the Harvest S&P Biotechnology Select Industry ETF and the Huatai-PineBridge NASDAQ Biotechnology ETF experienced modest increases of 2.39% and 2.18%, respectively.
Approximately 70% of cross-border ETFs saw losses exceeding 5% during this correction period, with the Invesco Great Wall Nasdaq Technology ETF experiencing the most significant downturn at 10.5%. Other products, including the Hong Kong Internet ETF and the China Concept Internet ETF, also fell by more than 8% over the two-week span.
During the ongoing market adjustments, the premium rates of several cross-border ETFs tempered slightly. On July 26, five products, including the Nasdaq Technology ETF, displayed an initial premium exceeding 5%. However, following the vigorous upturn witnessed on July 29, the number rose to ten products maintaining such premiums.
Among them, the Invesco Great Wall Nasdaq Technology ETF emerged at the forefront with an IOPV premium rate of 15.03%. Multiple ETFs tracking indices such as the Nasdaq 100, Nikkei 225, and S&P 500 also showed premium rates above 5%.
Warning signs for high premiums have started to be sounded. This year, international markets have generally performed favorably, with substantial gains in indices such as the Nasdaq, which has increased by 15.63%, the S&P 500 with a 14.45% rise, and the Nikkei 225, up by 14.95%. Consequently, nearly 60% of cross-border ETFs have achieved year-to-date gains, with seven products boasting increases exceeding 20%.
The remarkable performance has led to heightened investor demand, with more than half of the cross-border ETFs seeing growth in their shares this year, and 28 ETFs experiencing more than double their growth figures. According to Wind data, the CMB Nasdaq 100 ETF's fund size soared from 127 million yuan at the start of the year to an astounding 2.236 billion yuan, marking an increase of nearly 17 times.
Other products like the Southern Dongzheng Index ETF and the Industrial and Commercial Bank of China Hong Kong Stock Connect High Dividend Select ETF also recorded over fivefold growths in their fund sizes. Amidst this trading frenzy, cross-border ETFs displayed a series of stunning instances of high premiums, risk warnings, and halts in trading.
According to one manager of a cross-border thematic fund, the most direct reason behind the premium shifts in cross-border ETF products is their correlation with the indices, which have showcased vigorous performances lately, leading to intense investor excitement. This surge in demand has resulted in rapid capital inflow within a short timeframe. Additionally, some speculation may arise from short-term funds capitalizing on this trend for aggressive trading.
The interplay of "T+0" trading mechanisms and quota constraints further accentuates the propensity for high-frequency trades, leading to continuous elevation of premiums within cross-border ETFs. The manager opined that while the premiums reflect a lively sentiment towards overseas investments, they are not sustainable in terms of duration; investor enthusiasm is bound to retract at some point.
As the second-quarter reports come in, some fund managers focusing on international markets have started issuing caution concerning risks. The team managing the Jianxin Emerging Markets Select Fund has noted that while tech companies continue to ramp up investments in AI, spurred by strong demand on the cloud side along with burgeoning edge and inference requirements, investors should be wary of potential short-term volatility risk given the ongoing price surges among these companies.
At the present juncture, investment analysts from CMB have observed that with a robust first-half performance from U.S. equities and the absence of signals indicating a slowdown in the AI rally, many Wall Street institutions have recently revised their target points for the S&P 500 upward. "Should economic data persist in showing signs of improvement with reduced inflation pressures, the Federal Reserve might begin easing interest rates by the second half of 2024, though the timing and scale of these adjustments remain uncertain," they projected.
In light of this, the analysts emphasized maintaining a vigilant outlook on sectors less sensitive to interest rate fluctuations, such as healthcare, consumer goods, and energy. Attention should also be directed towards industries like medical equipment and semiconductors which have excelled in declining inflation environments. Meanwhile, with Chinese economic fundamentals showing signs of strengthening, underappreciated Chinese concept stocks that remain undervalued and have been substantially overlooked by institutional investors present an opportunity worth exploring.