How good are exchange-traded funds like the Global X FTSE Greece 20 at tracking stock prices when no prices exist? Egypt in 2011 offers some insights.
When Cairo’s exchange was closed for almost two months during the Arab Spring uprising, speculators used a U.S.-listed security as a way of estimating where Egyptian equities would open once trading resumed. Turned out they were a little off: while the ETF slipped about 1 percent during the suspension, it plunged 8.1 percent after the exchange reopened.
The day of reckoning is coming for the Global X FTSE Greece 20 ETF, which for almost three weeks has been one of the only ways to speculate on shares in the Mediterranean country after its bourse was shut down. Based on its level now, investors are betting Greek stocks will resume about 8.3 percent below where they were when the Athens Stock Exchange was closed.
“The ETF trades as a proxy pricing mechanism for people willing to buy and sell the exposure, understanding that there’s some price dislocation because they can’t go out and buy the underlying assets,” said Chris Hempstead, the head of ETF sales at KCG Holdings Inc. in Jersey City, New Jersey. “There may be a reset to the Greek market, and GREK will jump or fall to reflect that move.”
While it’s not unusual for owners of country ETFs to have to guess which way stocks will move when overseas exchanges are shut for holidays, the Greek market has been closed for 14 trading days, the longest break since the 1970s, and will remain shut until July 19, according to the Athens bourse.
Greece has closed its banks and imposed capital controls in order to avert the collapse of its financial system.
The ETF slumped a record 19 percent on June 29, the first day the Athens exchange was closed. Since then, it’s regained 14 percent. In Europe, a fund tracking Greek stocks and listed in Germany, France and Italy was halted, making the U.S. version the only option.
That’s led to a surge in volume. The Global X ETF has traded about 3.4 million shares on average daily since the exchange closure, more than twice the volume in the prior month.
“Volume has been extremely heavy -- that’s a sign investors are on top of this,” said Blaze Tankersley, chief market strategist at Bay Crest Partners LLC, a brokerage firm in New York. “Greece is a well known issue in the market, so presumably investors have already discounted the vast majority of the uncertainty. They’re aware of the risks and the potential outcomes.”
Another indication of the direction of the Greek market comes from GREK’s biggest constituents, some of which have listings outside of Greece. American depositary receipts of National Bank of Greece SA have tumbled 13 percent in New York since June 26. Bottler Coca-Cola HBC AG, which makes up more than a fifth of the fund and is listed in London, has retreated 6.2 percent in that period.
ETFs, the fastest-growing segment of the money-management business, are bundles of securities that usually track an index and trade like a stock. In normal times, when demand for an ETF grows, its overseers create new shares in exchange for the basket of stocks underlying the fund, a process that helps keep the price of the ETF close to the prices of its holdings.
No such prices have been available in Greece for as long as its market has been closed. Since then, the fund hasn’t been able to buy, sell or transfer securities traded in Athens, Global X said on its website.
Instead, the firm has used an unspecified methodology to calculate a daily net asset value for the ETF. The exchange-traded security this month has changed hands at an average price that is about 6 percent above that NAV, the biggest premium since its inception in 2011, data compiled by Bloomberg show.
“During the closure of the Athens exchange, the fund will fair value its security holdings for which current market valuations are not currently available using fair value pricing pursuant to the pricing policy and procedures approved by the fund’s board of trustees,” a supplement to GREK’s prospectus said.
Hod Klein, a representative for Global X, declined to comment further.
The number of shares outstanding in GREK has remained at 31.4 million since June 29. The fund hasn’t had any flows since investors added $3.2 million to it that day.
There’s not much precedence for an exchange to close and an ETF tracking its shares to continue trading, making the Egypt example one of the only possible comparisons, according to Bay Crest Partners’ Tankersley.
Egypt’s exchange reopened in 2011 two days before a deadline that could have led to its removal from the MSCI Emerging Markets Index. During the closure, the Market Vectors Egypt Index ETF traded at an average daily premium of 17 percent to its NAV.
Greek stocks, relegated to emerging market status by MSCI Inc. in November 2013, are at risk of losing that designation as prolonged restrictive measures could lead to less market accessibility, the index provider said in June. They may be reclassified as a “standalone market,” a category that includes Jamaica, Botswana, Zimbabwe and mainland China.
MSCI has started asking institutional investors for feedback about Greece’s stock-market status.