With Market Closed, Trading Greek ETF Is Gamble, Guessing Game
“The ETF can’t be more liquid than the underlying, and we know the underlying can be become quite illiquid” - Howard Marks
Shutting down the Greek market has trained attention on exchange-traded funds tracking its stocks, adding an element of speculation to their prices as long as the Athens bourse is closed.In the U.S., owners of the Global X FTSE Greece 20 ETF will have less information in deciding how much the security is worth. It tumbled 17 percent. In Europe, the Lyxor ETF FTSE Athex 20 plunged on one exchange and was halted on two others. Trading on the Athens Stock Exchange was suspended until July 6 as the country moves to avert the collapse of its banking system.Traders will price the ETFs “on the information they have in front of them, and what they have is limited,” said Kevin Kelly, chief investment officer at Recon Capital Partners in New York. “Investors or advisers need to be prepared for how this is actually going to affect their portfolio.”
While a minor plot in the larger Greek saga, the ETFs have captivated investors in recent months as they looked to express views on the future of its markets. When Egypt’s exchange was shut for two months during the Arab Spring uprising in 2011, investors bid up the Market Vectors EgyptIndex ETF only to see it plunge when the exchange reopened.In a prospectus published on its website, Global X noted that it may be unable to buy or sell securities or financial instruments should an exchange or market close. The fund may be unable to price its investments and could incur trading losses in such circumstances, it said.While owners of country ETFs often must guess whether stocks will rise or fall when overseas exchanges are closed for holidays, forecasting a market as volatile as Greece, particularly if the halt is extended beyond a day or two, presents special challenges.
For the companies that manage the funds, an extended closure complicates the process through which they balance supply and demand for ETFs in one market while keeping its prices aligned to trading levels in another.Normally, when demand grows for an ETF, its overseers issue new shares to institutions in exchange for bundles of the stocks or other assets that underlie it. In the case of the Market Vectors Egypt Index ETF, that process was halted by the security’s adviser for almost two months while Egypt’s exchange was closed.