Closing Greece’s Exchange Puts Focus on ETFs Without Prices

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The Hellenic stock exchange in Athens on June 22, 2015.

Photographer: Kostas Tsironis/Bloomberg

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 Egypt Index 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.

Fluid Situation

“The situation in Greece is fluid and we are monitoring events closely,” said Bruno del Ama, Global X’s chief executive officer, according to an e-mailed statement Sunday.

Lyxor’s ETF declined 16 percent on Germany’s Xetra platform while it was halted on Italian and French exchanges. The company will update investors daily on its website, according to a spokesman.

The asset management unit of Societe Generale Group said it had temporarily suspended subscriptions and redemptions, the process ETF advisers use to keep prices aligned with supply and demand.

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. The benchmark ASE Index surged 16 percent last week after dropping 11 percent the previous one.

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Investors aren’t completely in the dark about Greek shares. Many of the Global X’s biggest constituents have listings outside of Greece, including Coca-Cola HBC AG, which makes up 20 percent of the fund. The stock slipped 2.6 percent in London.

ETFs, the fastest-growing segment of the money-management business, are bundles of securities that change hands on an exchange like stocks. In normal times, they move in tandem with indexes that reflect prices for public companies and rarely veer from those levels by more than a few percentage points.

‘Anxious Traders’

No such prices will be available in Greece for as long as its markets are closed. As a result, ETFs tracking the stocks will resemble closed-end funds, which often trade at greater spreads to their underlying assets, according to Eric Balchunas, an analyst with Bloomberg Intelligence.

“Don’t be surprised if you see GREK’s volume double or triple during this time,” Balchunas said, referring to the ticker of the Greek fund traded in the U.S. “The ETF will be the only game in town for anxious traders who want to express an opinion on Greece as the drama unfolds.”

The direction of the ETF is an urgent matter to investors who have pumped money into the fund every single week of 2015, including $37 million in the five days ended June 26. In total, it received $278 million this year, with its market cap reaching an all-time high of $366 million on Friday.

ETF Premium

The ETF has been trading at an average premium of 1.1 percent to the value of its assets this month. Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ in New York, expects the premium will turn into a discount.

“Without the net asset value being easily calculated, we would expect the price will trade at a discount as the market is closed and people will be exiting,” Rosenbluth said. “But I think people who are in this are prepared.”

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.

“Markets are obviously not going to react favorably,” Joseph Tanious, an investment strategist at Bessemer Trust in Los Angeles, said in a phone interview. The firm oversees more than $100 billion. “I suspect even ETFs are going to take it on the chin.”

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