Overseas ETFs - free money today ??

Discussion in 'ETFs' started by Tarl_Cabot, Jul 26, 2007.

  1. What am I missing ?

    All the big oveseas ETF's - Emerging Markets, China, etc. - are all down about 3% right now on the day. (The underlying stocks stopped being traded before the open of the US markets.)

    At the close of trading, the ETF value will be reset to match the collective value of the underlying stocks - NOT the bid and ask for the ETF.

    Isn't this a free 3% on your money ? Why aren't the Hedge Funds snapping these up ?

    I thought that "arbitrage" was always carefully monitored by many large funds ?
  2. What are you talking about?

    The end of day NAV? Nobody cares, it's just an estimate. What matters is where those stocks open tomorrow morning. That's what the US market is trying to pin down, and that's why these ETFs are down hard.

    Can you be specific about how someone would make "free money" from overseas ETFs? Because I don't think you understand how ETFs work.

  3. So, you are saying that the hedge funds are predicting that the Chinese market will open down tomorrow because the US market is down ? Seems a gamble... there's always other factors, other news...

    And the NAV is stabilized by allowing large funds to buy or sell the underlyings at the close of the US markets. (See earlier thread from a few months back on this).
  4. Tarl, you have no idea what you are talking about.
  5. That's a helpful comment with interesting details.
  6. For the newbies, a China ETF is based on the prices of underlying Chinese Stock Market equities, call them A, B, C, D, and E.

    At the open of the US Stock Market, the Chinese Stock Market is closed, so any variations in the price of the ETF only reflect the reluctance or enthusiasm of US buyers of the ETF.

    At the close of the US Stock Market, the ETF (usually a large entity like Barclays Bank) will trade shares of the ETF for actual shares of the Chinese Stock Market - in sufficiently large amounts, and with a fee charged for the transaction. This prevents the US Stock Market fluctuations from causing the ETF's value to not reflect the Chinese Stock Market.

    If these ETFs are down 3 or 4%, then this only means:
    - Everyone expects the Chinese Stock Market to open down 3 or 4% OR
    - Everyone is waiting for the bottom during the day today to buy OR
    - There is an unseen arbitrage opportunity
  7. That is precisely the case. The ETF tracks the expected value of the portfolio. Even if the underlying stocks aren't trading in China, their value still fluctuates based on news, adverse events, etc. The ETF is priced based on the market consensus of what the underlying stocks are worth.

    Given how much of China's economy is based on exports to the US, is it any surprise that bad news for the US is treated as bad news for China?

  8. But the interesting part is that the ETF opens as the value of the underlying Chinese stocks, not the US market consensus of what the underlying stocks are worth.

    The US market consensus only applies during US market hours, and since the ETF's cap is usually a fraction of the underlying stocks, then it doesn't directly affect the opening price at all.

    So, if you buy or sell the ETF at any significant amount different from the open, you are accepting other people's forecast - which won't include any event that happens after the US market close.

    So, it still seems to me to be a good buy if the foreign ETF is less than the open, or a good sell if it is more than the open... yeah, the Dodgers should beat the Giants, but that is different from it actually happening that way...
  9. Surdo


    Have another bong hit you freak.
  10. Hey Tarl,

    I think you're right! By making this trade you can play an important part in keeping ETF prices in sync with stale NAVs until the market opens in China!

    Of course, I don't know the size of your stake, but you _are_ just one guy. If you really want to make the prices move you should probably do it after hours when there's not so much liquidity from all those emotional US traders. You may find the spreads a little wide, but if the ETF is really nominally underpriced that's hardly a concern, right?


    uhhh ... you won't mind if I take the other side of those trades, will you?
    #10     Jul 26, 2007