The recent turbulence in the cross-border ETF market has left many investors in a state of confusion and alarmJanuary 10 marked a significant downturn for these funds, as gravity pulled down the previously inflated prices to reveal a stark reality—many investors were trapped in these high-premium assets as they began to plummetIn a landscape where 137 cross-border ETFs were traded, only two—the S&P Oil & Gas ETFs—registered a gain, while the rest succumbed to losses, showcasing an alarming trend of "killing the premium." Investors flooded social media, expressing their disbelief and panic as they faced steep declines in net asset values.

This sudden shift was reminiscent of a game of musical chairs that had come to a jarring haltFor instance, the Asia Pacific Select ETF boasted a premium rate of 20.56% at midday, only to nosedive to 7.72% by the end of the session

Early trading showed this fund up by 6.28%, but it suffered an immediate drop of 10.64%, ultimately closing the day with a 5.02% loss, making it the day's worst performer across the marketThe Saudi ETF experienced a similar fate, starting the day with a 19.02% premium and finishing at just 7.63%, reflecting a broader trend of volatility and instability within the ETF sector.

As the new year commenced, the Chinese stock markets displayed a disappointing performance, leading to a rush of speculative trading in cross-border ETFsOn January 9, findings showed that 28 cross-border ETFs had premium rates exceeding 5%, with seven surpassing the 10% markThe S&P Consumer ETF escalated to an astonishing 51% premium, aided by a turnover rate of nine times the average, while others like the Saudi and German ETFs also surpassed 10 timesThis excessive speculation prompted trading suspensions for some funds on January 10, with notifications to follow regarding their resumption

• Fed to Pause Rate Cuts
• A Massive Drop in This Type of ETF!
• A-shares Welcome a Major Development!
• Renewable Energy Fuels the AI Revolution
• Cross-Border ETF Premiums and Risk Warnings

Yet, while some ETFs cooled off, new opportunities were lurking in the shadows.

On the very same day, a new wave of excitement emerged with two specific funds—the S&P Oil & Gas ETFs—drawing the attention of investorsThe turnaround was striking, where the First Trust S&P Oil Field ETF's turnover surged from 1 to 9 times, translating to a transaction volume from 200 million to 2.1 billion yuanSimilarly, the Harvest S&P Oil Field ETF's turnover ramped up from 2 to 11 times, with its trading volume ballooning from 800 million to a staggering 4.8 billion yuan, resulting in modest gains of 1.89% and 1.56%, respectivelyThey stood out as the only two ETFs to appreciate in value amid widespread declines.

However, the ephemeral nature of such premium observations in the finance and investment arenas cannot be overstatedSpeculators may find their fortune fleeting, as the cooler reality often sets in just as fast; indeed, the S&P Oil Field ETFs are unlikely to escape this trend of premium evaporation

History suggests a cyclical pattern often ensues—spurred by a surge of speculative funds leading to high turnover and inflation of premiums, then facing trading suspensions, followed by a rapid decimation of those premiumsThis routine unnervingly echoes through the market.

Yet, what exactly causes these cross-border ETFs to manifest such high premiums so frequently? The reasons are multifacetedFor one, most cross-border ETFs operate on a T+0 trading model, which allows investors to buy and immediately sell on the same dayThis mechanism significantly enhances its appeal to traders, who can leverage market fluctuations to their advantage, often resulting in a flurry of buying and selling within a single trading session.

Moreover, there exists a prevailing issue concerning the inadequate QDII (Qualified Domestic Institutional Investor) quotas imposed on various fund companies

This shortfall creates a scarcity of redeemable shares in the cross-border ETF market, leading to an imbalance between supply and demandIn a typical scenario where both internal (on-market) and external (off-market) arbitrage opportunities are viable, one would expect premiums to stabilizeHowever, due to the lack of availability of off-market shares for redemption, a significant disparity between buying pressure and selling opportunity emerges, thereby inflating premiums arbitrarily.

Reflecting on past patterns, we see that high premiums are typically unsustainableAs soon as market conditions shift, the momentum gained can quickly evaporate, often catching investors off guardThis precarity serves as a stark reminder for market participants to remain vigilant and temper expectationsThe allure of profit in high-risk zones may tempt investors into precarious positions, akin to playing with fire; such high-stakes situations pose considerable risks and could lead to substantial losses as a result.

In light of this environment, a prudent approach for investors is to focus on asset allocation that emphasizes avoiding premium-laden products and instead channel investments toward QDII assets devoid of such concerns