In a startling turn of events, the market has witnessed a significant downturn in the trading of cross-border Exchange-Traded Funds (ETFs) recentlyThis downturn has been catalyzed by the suspension of trading for four ETFs, which were affected by steep premiums, amidst a flurry of warnings from fund companies regarding the risks associated with these premiumsThe overall landscape for high-premium cross-border ETFs is shifting, with a noticeable decrease in their numbers following this event.

The series of trading halts began on January 10, when several prominent fund management companies, including Southern Fund, Invesco Great Wall Fund, Guotai Fund, and Harvest Fund, announced they would suspend trading on select high-premium cross-border ETFs starting from January 10, 2025. The measure aims to shield investors from potential losses during irrational market fluctuationsIndustry experts suggest that such trading halts serve as a warning to speculators involved in the market frenzy, signaling the need for prudence.

On the afternoon of January 10, ten additional high-premium cross-border ETFs from companies like Huaxia Fund, Wutong Fund, and Huaan Fund issued further warnings about premium risks

This sudden increase in caution reflects the heightened volatility and speculative activity within the cross-border ETF market.

During trading on January 10, an alarming drop was recorded for several high-premium ETFsFor instance, the Asia-Pacific Select ETF initially surged by over 7%, only to close down by 5%, culminating in an intra-day blow of 12%. Meanwhile, the Huaxia S&P 500 ETF experienced an initial rise of over 8% but ended the session down by 3.56%, with a staggering intra-day drop of more than 11%. Similarly, the Hua Tai Bai Rui Saudi ETF recorded a decrease exceeding 10%. These drops signify a drastic correction in pricing for ETFs that were previously displaying high premiums.

The magnitude of this decline has somewhat alleviated the high-premium situation for cross-border ETFs, as following the tumultuous trading day, no remaining cross-border ETFs exhibited premium rates exceeding 10%. This reflects a market correction in response to the preceding speculative behavior.

A wave of speculation had previously engulfed the cross-border ETF sector, leading to prices that markedly deviated from the net asset value (NAV) of the funds

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On January 9, certain ETFs, like the Invesco Great Wall S&P Consumer ETF and the Southern Saudi ETF, hit their daily price limitsOther ETFs such as the Harvest German ETF and Asia-Pacific Select ETF recorded gains exceeding 9%, with the Hua Tai Bai Rui Saudi ETF and Huaan German ETF rising by 7.62% and 4.02%, respectivelySuch instances of price spikes in ETFs are noted as infrequent occurrences, showcasing the unusual volatility in the market.

Considering the broader context, ETFs are designed to provide investors with a diversified portfolio of stocksHowever, the recent performance of Chinese-listed cross-border ETFs has starkly contrasted with traditional indices such as the German DAX and S&P 500, which have recorded modest annual gains of 2.04% and 0.62%, respectivelyIn stark contrast, the aforementioned cross-border ETFs have outperformed significantly, with gains surpassing 20% in some cases within the year.

Investor activity within the cross-border ETF market has ramped up, with heightened attention and capital flowing into these products

This influx has been bolstered by the T+0 trading characteristic of ETFs, prompting active intra-day tradingOn January 9, the Harvest German ETF boasted an astonishing turnover rate of 18.3 times, while the Southern Saudi ETF reached a turnover rate of 11.93 timesA total of eight ETFs, including the S&P Consumer ETF and Asia-Pacific Select ETF, had turnover exceeding 1. This level of trading activity highlights the speculative frenzy that has characterized this sector, leading to unprecedented turnover and transaction amounts.

Amidst this backdrop, fund managers issued critical warnings on January 10 concerning the continued risks associated with high premiums for cross-border ETFsFor example, in the case of the Invesco Great Wall S&P Consumer Select ETF, its market trading price diverged from the NAV by a staggering 51.82%. Experts have cautioned that should the market return to a value aligned with its benchmark index, holders of these ETFs could face losses exceeding 50%, amplifying the importance of awareness and risk management for investors.

To protect investor interests, and in compliance with the Shenzhen Stock Exchange's regulations, multiple fund companies promptly announced trading suspensions on their high-premium ETFs on January 10. These companies emphasized that the trading halts aim to mitigate unnecessary losses resulting from market volatility and high premiums.

Southern Fund, in a public statement, expressed the importance of remaining rational in investment decisions, especially in light of the potential unpredictability associated with the second market prices of cross-border ETFs

They urged investors to remain vigilant and to acknowledge the premium risks along with uncertainties in the overseas market, advising cautious asset allocation based on individual risk tolerance and investment goals.

In addition, ETFs such as the Southern East England FTSE Asia-Pacific Low Carbon Select ETF, Huatai Bai Rui Northern East England Saudi Arabia ETF, and Huaxia S&P 500 ETF announced temporary trading suspensions that will last until 10:30 AM on January 10, 2025. This reflects a collective acknowledgment by fund companies of the elevated risks present in the current investment climate.

As the situation unfolds, the frequency of premium-related advisories from public fund companies signals a heightened state of alert among market participantsFollowing the close on January 9, over 20 cross-border ETFs issued warnings regarding premium risks, indicating widespread concern within the investment community.

Furthermore, the Southern Fund reiterated that the trading prices of cross-border ETFs in the secondary market are influenced by a multitude of complex factors, including supply-demand dynamics, systemic risks, and liquidity conditions