In recent weeks, the surge in cross-border Exchange-Traded Funds (ETFs) has garnered significant attention, primarily due to widespread price increases that have led to considerable premiums over their net asset values (NAVs). This phenomenon has resulted in a pronounced disconnect between the trading prices of these ETFs and the underlying assets they represent, screaming potential risks for investors who are drawn to the vibrant market dynamics.

On January 9, two prominent ETFs, the S&P Consumer ETF and the Southern Saudi ETF, hit their daily price limitsOther ETFs, including the Jingshan Germany ETF and Asia-Pacific Select ETF, saw price increases exceeding 9%. In a broader context, the Huatai-PB Saudi ETF and the Huaxia Germany ETF rose by 7.62% and 4.02%, respectivelySuch price escalations for ETFs, which are fundamentally designed to track a basket of stocks, are indeed rare, especially given the tumultuous nature of global capital markets to start the year.

Interestingly, while major indices like Germany's DAX and the US's S&P 500 have only witnessed minimal increases this year—2.04% and 0.62%, respectively—the cross-border ETFs tracked in China have outperformed significantly, with both the S&P Consumer ETF and Southern Saudi ETF marking impressive gains of more than 20%. Furthermore, the Jingshan Germany ETF, Asia-Pacific Select ETF, and Huatai-PB Saudi ETF are all showing annual gains exceeding 10%.

The sharp performance of these cross-border ETFs can be attributed to a surge in market liquidity, which is fueling rapid inflows and driving prices upward across several products

The trading volumes for the S&P Consumer ETF and Southern Saudi ETF on January 9 reached an astounding CNY 5.699 billion and CNY 4.524 billion, respectively, placing them among the top two ETFs in terms of transaction amounts in China's equity market.

Despite this frenzy, many of these impacting ETFs like the Jingshan Germany ETF, Southern Saudi ETF, and S&P Consumer ETF are relatively small in scale, with fund sizes around CNY 117 million, CNY 323 million, and CNY 435 million, respectivelyThe characteristic T+0 trading of ETFs makes them particularly accessible for intraday trading, instigating a high turnover rate for these smaller productsThe Jingshan Germany ETF boasted an astounding turnover ratio of 18.3 times, while the Southern Saudi ETF reached 11.93 timesSeveral other ETFs exhibited turnover ratios exceeding one, often breaking records for both turnover rates and transaction amounts in a single day.

However, these soaring trading prices have raised concerns regarding potential excessive premiums and risks of price corrections

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Currently, data indicates that 28 cross-border ETFs have premiums exceeding 5%, and among these, seven stand out with premiums surpassing 10%. Strikingly, the S&P Consumer ETF has the highest premium, hitting a staggering 51.82%, emphasizing the potential vulnerabilities lurking within this apparent overvaluation.

In contrast, the Southern Saudi ETF also reveals a concerning premium above 20%, yet its net asset value has only increased by a slight 0.4% this year, flagging it as another candidate for potential downside risksThe interplay of exchange rate restrictions and attractive performance has led to many cross-border ETFs being temporarily unavailable for additional outside investments, exasperating the situation further as investors attempt to capitalize on these burgeoning offers.

The restriction in foreign currency quotas often causes fund companies to halt external purchases of cross-border ETFs once their foreign exchange allocations are exhausted

In such cases, investors are left with no choice but to pursue the products available within the domestic marketConsequently, this ignites a scenario where the NAV of these funds exceeds the NAV of similar funds available outside, which further escalates the premiums on these ETFsMany investors frequently overlook the risks associated with these high premiums, attracted by the rapid gains instead.

Additionally, various challenges—including time differences in cross-border trading and fluctuations in exchange rates—contribute to scenarios where discrepancies between an ETF's NAV and trading price can exist, leading to instances of both discounts and premiums on fund productsIndustry professionals have pointed out the importance of managing these premium risks, particularly for cross-border ETFs, stressing that short-term speculation is not advisable.

On January 9, numerous fund companies reiterated their warnings regarding premium risks associated with their cross-border ETFs, leading several to temporarily suspend trading as a protective measure

Following an earlier announcement on January 8 regarding the S&P Consumer ETF and others, various funds issued alerts about excessive premiums affecting their trading pricesSuch frequent alerts highlight the growing concern within the industry regarding the sustainability of these inflated prices.

The S&P Consumer ETF seems particularly susceptible, having a consistent history of high premiums, while also garnering immense demand resulting in multiple risk warning announcementsGiven that this particular ETF has released over 30 warnings in a month, it illustrates the heightened need for investor vigilance in the current climate.

In conclusion, the current surge in cross-border ETFs symbolizes not only robust market engagement but also a critical juncture for investors to introspect on their strategiesThe diverging performance from the underlying markets presents both compelling opportunities and formidable risks