In recent weeks, several cross-border exchange-traded funds (ETFs) have experienced significant premiums, catching the attention of both institutional investors and cautious observersWarnings have been issued repeatedly by financial institutions regarding the rising risks associated with these premiums, yet the allure of these investment vehicles has not been dampened.

Take, for example, the E Fund MSCI U.S50 ETF, which made headlines when it issued six alerts on premium risk within the span of just six trading days beginning January 23. Despite these warnings, enthusiasm from investors was palpable, leading to a scenario where trading of the fund was suspended on January 30 due to rampant purchases.

It’s worth noting that following its resumption, the fund plummeted in value, yet the premium remained substantial, hitting 14.61%. At one point earlier, on January 25, the premium had soared as high as 43.47%, a troubling indicator for those paying attention to the fluctuations in market sentiment.

Institutional warnings urged investors to remain vigilant regarding the market price premiums associated with these ETFs; failure to do so could result in significant losses

High premiums often indicate that the market price of a fund is trading well above its net asset value (NAV), an unsettling phenomenon for long-term investors.

Premiums Have Surged Beyond 40%

On January 30, E Fund reiterated through a public statement that its E Fund MSCI U.S50 ETF was witnessing trading prices significantly above the reference net asset value, prompting another round of consumer alertsOn January 29, the ETF closed at 1.379 Renminbi, translating to an alarming premium of 28.42% over the reference NAV.

Investors were reminded that the trading prices of E Fund MSCI U.S

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50 ETF are influenced not only by changes in the net asset value but also by external market dynamics, such as supply and demand, systemic risks, and liquidity challenges—factors that could adversely impact their investments.

Despite previous warnings about premium risks, interest in this ETF did not waneThe escalating premiums raised eyebrows, leading to a situation where the fund was forced into suspension to safeguard investor interestsOnce trading resumed on January 30, a sharp decline occurred, suggesting heightened volatility moving forward.

Looking ahead, E Fund indicated in their communications that they may implement additional measures such as increasing the frequency of trading suspensions based on evolving market conditions, underscoring an adaptive approach to managing investor risk.

On January 30, the fund reported a return of 10.01%, yet it still remained at a dangerously high premium with a spread rate of 14.61% and a discount rate of 15.59%, liquidity indicators projecting future concerns.

Interestingly, the E Fund MSCI U.S

50 ETF, launched in November 2023 with a subscription base of 233 million Renminbi, has been a successful venture that could potentially be secured further through the increased demand from investors.

In fact, the strong interest from investors in the E Fund MSCI U.S50 ETF has also played a pivotal role in saving the fund from nearing the brink of liquidation, previously reported to be hovering near critical financial thresholds.

As per E Fund's advisory, as of January 9, 2024, the fund had recorded a worrying streak of over 30 consecutive working days where its net asset value stayed below 50 million RenminbiIf this situation continued for another 20 days, it would invoke contractually obligated liquidation procedures.

However, as of January 29, the fund's circulating shares surged significantly, reaching over 229 million, with the circulating net asset value calculated at approximately 246 million Renminbi—far from the liquidation threshold.

Multiple Cross-Border ETFs Have Raised Caution Flags

This phenomenon is not isolated to just the E Fund MSCI U.S

50 ETFOther cross-border ETFs, including the Nikkei 225 ETF, S&P 500 ETF, and Nasdaq 100 ETF, have also reported similar premiums recently.

On January 30, Huaxia S&P 500 ETF joined the chorus, alerting investors of significant price discrepancies between market trading prices and the fund's reference NAVThis announcement urged careful consideration of premium risks in the secondary market, with plans to suspend trading on January 31 to protect investor interests.

Similarly, ICBC Credit Suisse Nikkei 225 ETF issued a premium risk alert on the same day, indicating potential issues for investors in the rapidly shifting market landscape, underscoring the widespread nature of this dilemma.

Due to limits imposed on QDII quotas, many institutions have also halted large-scale subscriptions recently, adding another layer of complexity to the market dynamics.

For instance, on January 26, the Bosera Nasdaq 100 ETF made an adjustment, reducing the maximum subscription for each account from 1 million to 100,000 Renminbi in a bid to manage unexpected inflows.

The Huaxia Nasdaq 100 ETF and Huaxia S&P 500 ETF have also suspended subscription and fixed investment activities since January 24.

The causes driving the current frenzy within cross-border ETFs, according to analysts at the Xingtu Financial Research Institute, are complex but fundamentally rooted in the restrictions related to QDII quotas