As the new year of 2025 unfolded, the A-share market did not witness the anticipated "good start" that investors had hoped forInstead, some capital began to shift its focus to overseas markets, leading to a substantial rise in the premium rates of several cross-border Exchange-Traded Funds (ETFs). This surge in activity was met with a flurry of risk warnings from fund managers, with over 340 risk alerts issued in the past month alone, and some products even faced temporary suspensions from trading.

On January 8, following an alarming string of 30 premium risk notifications and a suspension of trading for one hour over 15 working days, the S&P Consumer ETF encountered a troubling phenomenon characterized by "three highs": an Indicative Optimized Price Value (IOPV) premium rate soaring to 38.6%, a single-day trading volume reaching 6.064 billion Yuan, and a turnover rate of 1028.91%, all of which represented unprecedented historical records.

The predicament of high premiums has not been isolated to just a few products

By the close of trading on January 8, a total of 30 Qualified Domestic Institutional Investor (QDII) products exhibited a premium above 3% on their IOPVThe sustained premium surrounding these products has drawn considerable attention and capital, driving up both trading volumes and turnover ratesHowever, such elevated premiums are not the norm, and the underlying risks are significant.

A representative from the China Merchants Fund Investment Advisory Department noted that the premium phenomenon is essentially a reflection of globalization and the increasing integration of financial marketsInvestors are starting to look beyond borders, and cross-border funds offer them an avenue to access global investment opportunities without leaving their homes.

"Investing in a high-premium ETF means effectively preemptively overdrawing the expected growth aligned with the premium

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This could lead to considerable losses once the premium retracts," commented a representative from a public fund company in South ChinaFrom a long-term perspective, due to the existence of arbitrage mechanisms between primary and secondary markets, the high premiums seen in the secondary market are unlikely to persistOrdinary investors should exercise extreme caution with ETFs exhibiting high premiums.

The Recurrence of High Premiums

On January 8, the Invesco Great Wall S&P Consumer Select ETF (commonly known as the S&P Consumer ETF) was suspended for one hour due to soaring premiums yet continued to oscillate positively upon resumption, ultimately increasing by 4.92% on that day

The IOPV premium rate peaked at 38.6%, leading all similar productsAdditionally, the fund captured a remarkable trading volume of 6.064 billion Yuan and achieved a turnover rate of 1028.91%, both setting new historical highs.

This scenario of high premiums persisted for several daysHistorical data reviewed indicates that as of January 8, the IOPV premium rate for the Invesco Great Wall S&P Consumer Select ETF had exceeded 10% for 16 consecutive trading days, often fluctuating above 30%. As a result, the ETF had continuously issued warnings about premium risks for 30 working days and had been suspended for trading in the morning sessions on 15 occasions.

However, these warnings failed to have the desired effect as the enthusiasm from investors remained fervently high

Data shows that the latest daily trading volume of the Invesco Great Wall S&P Consumer Select ETF had magnified over 20 times compared to the same period in December 2024, when the trading volume on December 9 was reported at 245 million YuanBehind this massive trading activity, the stakes were frequently exchanged, resulting in an average turnover rate of 342.1% over the past month, the highest among all cross-border ETFs, indicating clear signs of speculation.

Simultaneously, funds are rapidly rushing into the marketAs of January 7, the Invesco Great Wall S&P Consumer Select ETF had drawn in over 181 million Yuan in the past month, expanding its size from 303 million Yuan to 438 million Yuan in just one month—a staggering growth of 45%. This further underscores the market's eagerness for this product.

The high premium phenomena observed in cross-border ETFs are not isolated incidents

Against a backdrop of continuous fluctuations within the A-share market, the steady performance of overseas markets has captured investor attentionWith a T+0 flexible trading mechanism, cross-border ETFs have witnessed considerable speculative activity, making high premiums a distinctive marker for these products.

Statistical data reveals that as of January 8, there were 30 cross-border ETFs exhibiting an IOPV premium rate exceeding 3%, with half of those products having IOPV premium rates surpassing 5%. Beyond the Invesco Great Wall, the S&P Consumer Select ETF, the GF S&P 500 ETF, and the Huaxia S&P 500 ETF both displayed premium rates greater than 10%, standing at 15.67% and 10.09%, respectively.

High premiums correlate with elevated trading volumes and turnover rates—the "dual highs" characteristic

For instance, the Southern Fund Saudi Arabia ETF, with an IOPV premium rate of 9.58%, saw its turnover rate skyrocket to 1429.18% in one day, with the latest transaction volume of 4.775 billion Yuan compared to a mere 26 million Yuan in the previous month in December 2024.

Market insiders note that the recurring high premiums often signal an overheated trading environmentShould market sentiment recede or the fund reopens for subscription, arbitrageurs may flock in, causing the fund price to quickly revert to its net value, thus diminishing or even eliminating the premium.

"If the premium returns to the proximity of the net value, it implies that subsequent growth must exceed this premium level to yield profit

Consequently, investors who bought at inflated levels may incur losses," mentioned personnel from a fund research team in Shanghai, advising investors to tread cautiously and avoid succumbing to inflated market sentiments.

In fact, such situations have occurred in the past where many products, once enjoying "difficulty in adjusting premiums," eventually returned to calm amid the "passing the hot potato" scenarioTaking the example of a dividend Hong Kong stock ETF, this fund saw a 16.53% rise over three trading days from December 24 to 26, 2024, with its IOPV premium escalating from 0.62% to 15.31%. On December 26, its trading volume reached 363 million Yuan, a staggering increase of over 50 times compared to three days prior (December 23), during which the turnover soared from 9.23% to 429.26% demonstrating the evident occurrence of the three highs phenomenon.

However, following its resumption of trading on December 27, the dividend Hong Kong stock ETF faced a sharp decline, plunging to its daily limit with its IOPV premium falling to just 3.89% within one day and sliding to -0.04% by December 31. Subsequent trading days witnessed consecutive drops, accumulating a total decrease of 14.42% from December 27 to January 8, 2025.

Can the "Difficulty in Adjusting Premiums" Phenomenon Persist?

The occurrence of premiums in cross-border ETFs primarily stems from differing pricing mechanisms between the primary and secondary markets

One reflects the real-time trading price in the secondary market, while the other represents the IOPVThe discrepancy in pricing between these two markets is referred to as premium/discountHigh premiums have been repeatedly observed in cross-border ETFs in recent years.

According to the representative from China Merchants Fund, "When a particular cross-border product remains in high demand, its trading price can drift away from the fund's net value, thus producing a premiumGiven the existing restrictions on purchasing, it becomes impossible to quickly cover the premium through the primary market, leading to potentially extended periods of high premiums."

Additionally, an individual from a public fund company in South China pointed out that when a specific ETF experiences favorable fundamentals or news, market sentiment tends to soar, prompting the ETF price to continuously rise due to ample buying power

Once the price exceeds the true value reflected by a basket of stocks, a premium results; conversely, if the price lowers beneath this value, a discount occurs.

"In theory, the price discrepancy between primary and secondary markets creates arbitrage opportunities," the representative explained the rationale: during premium phases, professional investors can buy a basket of stocks in the primary market to acquire ETF shares and sell them in the secondary market at elevated prices to profit from the spreadConversely, in discount situations, investors may buy ETFs in the secondary market redeem them for stocks in the primary market, and then liquidate those stocks at market value.

"However, it’s important to note that this arbitrage mechanism requires significant capital and operational efficiency

Not only must investors monitor the market constantly, but they also need to be cognizant of execution issues and the real-time adjustment of order quantities, which could amplify liquidity risks and heighten operational challengesAdditionally, thanks to the existence of the price discrepancy arbitrage mechanism and the tendency for market sentiment to gradually return to rationality, ETFs’ premiums and discounts will ultimately align."

So, will the premium rates of cross-border ETFs remain high in the coming period, or will they gradually decline? A fund manager specializing in cross-border investments in North China commented, "Generally speaking, high premiums are not sustainableThe underlying QDII U.Sstock high premium often reflects an excessive reaction in market sentiment while indirectly showcasing the current preference for global asset allocation among investors."

The manager explained that whether the high premiums can persist depends on policymaking that sends stable currency signals, the pace of Federal Reserve interest rate cuts, and the trends in American stock markets

If the U.Sstock market continues to perform robustly and investors maintain confidence in related QDII funds, the premium rates could remain elevatedIn contrast, if the U.Sstock market takes a downturn or if investor sentiment regarding these risks increases, the premium rates are likely to gradually decline.

"In the context of a slowing economic cycle and frequent policy adjustments, it is essential to view the high premiums of QDII U.Sstock funds with a rational perspective." In the opinion of the fund manager, numerous factors influence premium rates, including U.Sstock performance, A-share market conditions, and constraints on QDII quotasFurthermore, the divergence among institutions regarding the future performance of U.Sstocks also introduces uncertainty into the market, and the increased volatility behind high premiums may expose investors who blindly follow trends to substantial risks.