As the world of finance evolves, the interest in cross-border investment opportunities continues to surge, bringing both excitement and cautionRecently, domestic investors have faced a striking scenario: the price of certain cross-border Exchange-Traded Funds (ETFs) trading on the domestic stock market was set at 1.7 yuan, while similar funds could be acquired outside the market for only 1.2 yuanThis scenario resulted in a staggering premium rate nearing 40%. This begs the question: Who exactly are the investors willing to pay such a premium for these cross-border ETFs?

Since the beginning of the year, the fervor for cross-border investments has only intensified, as evidenced by the market performanceBy January 8, several Qualified Domestic Institutional Investor ETFs (QDII-ETFs) saw dramatic price increasesFor instance, the Southern Fund's Saudi ETF shot up by 8.57%, while the S&P Consumer ETF experienced a notable rise of 4.92%, among othersThis notable surge suggested an underlying enthusiasm among investors for foreign market exposure.

However, venturing into these soaring QDII-ETFs comes with a risk—one that many investors appear to overlookThe S&P Consumer ETF's price was reported to be 38.6% higher than its indicative net asset value (NAV). Similar trends were observed with other ETFs tracking the S&P 500, where premiums exceeded 10%, leading to a total of 26 different cross-border ETFs exhibiting premiums beyond 5% on the marketSuch inflated prices signify a heated atmosphere that’s attractive on the surface, yet laden with perilous implications.

The Coexistence of High Premiums and High Enthusiasm

As of January 8, the trading volume for many cross-border ETFs was exceptionally robustThe S&P Consumer ETF and Southern Fund's Saudi ETF both surpassed 4 billion yuan in transaction volume, indicating strong investor interest

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Additionally, some of these ETFs boasted turnover rates exceeding an astounding 1000%, with the German ETF joining this elite groupOn that particular day, 11 cross-border ETFs saw turnover rates exceeding 100%, a clear signal of the rampant trading activity.

The high trading volumes naturally coincided with significant price premiumsThe S&P Consumer ETF stood out as having the highest premium in the market at 38.6%, with a closing price of 1.726 yuan, contrasting sharply with its intra-day reference NAV of 1.25 yuanInvestors who sought to add this ETF to their portfolios had to pay an average price of 1.7 yuan per share, a stark reminder of the pitfalls associated with inflated trading prices.

Such a high premium in ETFs was relatively uncommon previouslyIn an attempt to mitigate potential losses for investors, the fund manager of the S&P Consumer ETF, Invesco Great Wall Fund, issued a risk warning and announced a temporary trading halt from the market's 9 a.m. opening until 10:30 a.m. on January 9.

Not only was the S&P Consumer ETF exhibiting extreme premiums, but many other ETFs linked to U.S. markets also faced similar situationsFor example, the S&P 500 ETF and the general S&P ETF were both observing premiums over 10%. Moreover, various Nasdaq-related ETFs like the Nasdaq 100 ETF and others showed premiums exceeding 8%.

Beyond U.S. market ETFs, investors have also turned their attention to other regions, such as the aforementioned German ETF with a 4.15% premium, and the Southern Fund's Saudi ETF, which jumped 8.57% in value, despite the underlying FTSE Saudi Arabia Index showing a narrow decline that day, leading to a pronounced divergence in performance and a notable 9.58% premium for that fundSimilarly, the Huatai-PineBridge Southern Fund's Saudi ETF rose by 3.91%, with a premium of 3.48%. Such discrepancies highlight the volatile reality of the investment landscape.

Don't Fall for High Premiums

As compiled on January 8, statistics indicate that 26 cross-border ETFs are trading at premiums exceeding 5%, many of which are tied to indices such as the S&P and Nasdaq, alongside oil, gas, and educational ETFs

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Interestingly, the three ETFs exhibiting the highest premiums had share counts under 500 million, suggesting that smaller fund sizes are more susceptible to speculative trading pressure.

While fund managers frequently issue alerts about premium risks, the enthusiasm for cross-border investment remains perniciously highReports suggest that the managers of many QDII-ETFs have recently issued several warnings about premium risks and have resorted to temporary trading halts to safeguard investors' interests.

Notably, economists, including Yu Fenghui, caution potential investors about these risks associated with cross-border ETFsHe emphasizes that investors must first be vigilant about premium risks, especially given that the T+0 trading system allows for dramatic price fluctuations driven by supply and demandIf an investor purchases shares at inflated prices, they risk suffering losses when the premiums retractAdditionally, liquidity risks associated with ETFs could arise during market volatility or large-scale redemptions, potentially leading to misaligned buy-sell orders that delay trade execution and affect pricingMoreover, currency fluctuations and changes in overseas market policies can profoundly impact earnings from cross-border ETF investments.

To navigate this complex landscape, investors are urged to adopt a more prudent and balanced investment strategy when it comes to global asset allocationThis involves creating a diversified portfolio that encompasses not only stocks and bonds but also cash equivalents and alternative investments across a spectrum of asset classesOn a global scale, this means leveraging a combination of developed and emerging markets, enjoying the steady growth of mature economies while seizing the rapid development opportunities present in burgeoning markets.

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