In recent months, the financial markets have witnessed a curious trend regarding Exchange-Traded Funds (ETFs), particularly in the realm of currency ETFsThe considerable deviation between trading prices and the actual net asset values has raised eyebrows among investors, leading to concerns about the integrity of the pricing signals being transmitted to the market.

As the Lunar New Year approached, several currency ETFs experienced significant spikes; some recorded daily increases of over 9%. This abnormal upsurge in the market created a chasm between the secondary market prices and the underlying net values of these funds, with premium rates soaring close to 10%. However, as market sentiments cooled post-holiday, the release of various risk warnings from public funds led to a swift withdrawal of capital, resulting in sharp declines and even instances of trading halts for some funds.

The phenomenon of falling prices for some currency ETFs was not entirely unexpected; however, the disparity in premiums for various cross-border ETFs has been perplexing

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For instance, on February 6, the Xingyin CSI Hong Kong Stock Connect Technology ETF surged to its daily cap, buoyed by a premium exceeding 6%. In contrast, the Harvest DAX ETF experienced three consecutive days of declines, while the Invesco Great Wall S&P Consumer Select ETF continued its upward trajectory with a premium rate surpassing 40%.

Industry analysts attribute the unusual pre-holiday increases in certain currency ETFs to their limited scale and insufficient liquidity, which made them susceptible to targeting by short-term speculative capitalOn the other hand, the sustained high premiums in cross-border ETFs can be linked to multiple factors, including limited foreign exchange quotas, restrictions on investment in Qualified Domestic Institutional Investor (QDII) funds, and the growing demand for offshore investments

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The scarcity of underlying assets also plays a critical role in this dynamicAdditionally, the T+0 trading mechanism has further stimulated trading activities in the market.

In the context of ETFs, market prices tend to realign with net values once prevailing restrictions easeFor instance, the decline in demand for low-risk money management options following the festival, coupled with expectations of relaxed QDII purchase limits, could prompt shifts in pricingAs a result, investors considering entering the market at high premium levels are essentially engaging in a risky, speculative game, reminiscent of "passing the parcel."

According to Wang Fanglin, an assistant analyst at Morningstar (China) Fund Research Center, "If short-term speculators buy in when premiums are high and anticipate further price gains, they risk incurring losses when prices converge towards net values

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Elevated premiums create substantial disjunctions between trading prices and actual net values, sending erroneous pricing signals to the market and misleading investors regarding the real worth of ETFsThis can significantly disrupt normal market price discovery processes and heighten price volatility, jeopardizing financial market stability."

Prior to the Spring Festival, the market for currency ETFs experienced a rare and frenzied surgeOn January 24, multiple currency ETFs exhibited unusual movements, with some even reaching their daily capsNotably, the Guoshou Money Market ETF (511970) hit its cap, while the GF Tianli Money Market ETF (511810) and the Penghua Tianli ETF (511820) saw gains of 9.95% and 9.86%, respectively

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The Huatai Tianjin Gold ETF (511670) also recorded an increase of 7.13%. This momentum continued on January 27 when the Huatai Tianjin Gold ETF jumped over 9% once again.

However, on the first trading day immediately following the holidays, all these exceptionally high-premium currency ETFs issued suspension announcements and risk alertsBy February 6, following their resumed trading, both the Huatai Tianjin Gold ETF and the Guoshou Money Market ETF opened with a price cap drop, plummeting by 10%. Other ETFs such as the Rongtong Easy Payment Money Market ETF and GF Money Market ETF experienced declines exceeding 3%.

Typically, currency ETFs are low-risk cash management tools, and their prices do not fluctuate greatly, remaining close to the 100 Yuan mark

However, certain products, due to their limited scale and liquidity, can become volatile due to speculative short-term tradingFor example, the Huatai Tianjin Gold ETF saw its price soar to nearly 118 Yuan, while the sudden drop of 10% on February 6 eradicated over seven years' worth of interest earnings, with trading volume barely reaching 150,000 Yuan that day.

Given that currency ETFs operate under a T+0 trading system, investors can buy and sell the fund on the same day without any limitations on trading frequencyMoreover, upon selling, the funds become usable that day, while withdrawals are available from T+1, allowing investors to reinvest their funds quickly, thereby enhancing capital efficiency"Before the Spring Festival, many investors sought to allocate their funds for returns during the holiday

The inherent attractiveness of currency ETFs lies in their liquidity, low risk, stable earnings, and flexible trading," Wang notedThe significant increases in select currency ETFs attracted investors, generating a considerable influx of capitalHowever, the inflated premium erroneously conveyed pricing information, consequently misleading investors about the actual value of the ETFs.

Cross-Border ETFs Continue to Diverge

In contrast to the swift dynamics seen within currency ETFs, cross-border ETFs are characterized by persistently high premiumsAfter the Spring Festival, the first trading day (February 5) witnessed a steep drop in the Harvest Germany ETF, reaching its trading floor with a staggering transaction value of 22.2 billion Yuan and a turnover rate soaring to 7.66 times

By February 7, the Harvest Germany ETF had seen three consecutive days of decline, amounting to a total fall of 21%.

Although these cross-border ETFs experienced varying degrees of downturns after the holidays, their premiums remain robustThe Invesco Great Wall S&P Consumer Select ETF, for example, exhibited a premium exceeding 40% as of February 6. While its net value has increased by less than 11% over the past three months, the secondary market price has surged over 58%.

Moreover, other ETFs such as the Yinhua Industrial Bank Southbound Hang Seng New Economy ETF, Southern Fund Southbound Hang Seng FTSE Asia Pacific Low Carbon Select ETF, Southern Fund Southbound Hang Seng Saudi Arabia ETF, Hua Tai's Baotong Fund Southbound Hang Seng Saudi Arabia ETF, and Guotai Junan S&P 500 ETF also have premiums exceeding 10%.

In response to the persistent high premiums of cross-border ETFs, public funds have been issuing warnings about the potential for corrections

Taking the Harvest Germany ETF as an example, in a short span since January 8, 15 alerts concerning premium risks have been issued, alongside 13 instances of trading suspensions.

In addition to QDII purchasing limitations, the pricing and performance of cross-border ETFs in the secondary market illustrate the varying perceptions among investors regarding the investment worthiness of these assetsWang Fanglin further elaborates that the performance of cross-border ETFs is influenced by numerous factors, including global macroeconomic trends, policy shifts, sectoral developments, fund management practices, and regulatory changes both domestically and internationally.

"When global economic growth is robust, and corporate earnings outlooks are optimistic, QDII ETFs tracking foreign market indices tend to perform well