ETF divergence after Thailand's finance moves
Thailand's financial bungling of this week has led to an interesting divergence in ETF performance and the performance of indexes and mutual funds. Mutual funds, either managed or indexed, report their results daily based on the value of the securities in their accounts. ETF's, on the other hand, hold indexes of stocks but are traded as a stock. The value of the ETF stock does not necessarily reflect the value of their holdings. This is especially so because many ETF's are predominately held by institutions who own them both for investment and hedging purposes.
So this week after the Thai announcements the following happened. On Wednesday Asian markets rebounded and the Fidelity Southeast Asia mutual fund was up 1.6% and the Fidelity Pacific Basin Fund was up 1.1%. On the ETF side, EPP, the Pacific ex Japan ETF, was down 3.5% and EWS, the Singapore ETF, was down 2.7%. On average that's around a 4% divergence. On Wednesday and Thursday combined the huge EFA, the global Europe, Far East, Australia ETF, was down over 5% while global markets were modestly up for the two days.
What's going on here. While at first the issues of the week may have seemed like a one day event, using the ETF's global investors are selling and shorting the indexes in a big way, believing that these markets are now heading down, or gambling as some might say. Local investors in Asia see bargains and have jumped in to take advantage of what they see as an opportunity. That may be a real bad move, at least in the short term.
For now, someone should drag the Thai finance minister onto the golf course for the remainder of the year and not let him near another financial journalist. The Thai Central Bank's moves were naive and misguided in execution but they tried to bail out. The Finance Minister, however, has no idea how to speak publicly. When asked by a British journalist on a Bloomberg video if he had consulted with other Asian finance ministers about these actions he said "No, but they all know me and if you are Asian you understand this. We all do." Well that certainly reassured everyone.
So this week after the Thai announcements the following happened. On Wednesday Asian markets rebounded and the Fidelity Southeast Asia mutual fund was up 1.6% and the Fidelity Pacific Basin Fund was up 1.1%. On the ETF side, EPP, the Pacific ex Japan ETF, was down 3.5% and EWS, the Singapore ETF, was down 2.7%. On average that's around a 4% divergence. On Wednesday and Thursday combined the huge EFA, the global Europe, Far East, Australia ETF, was down over 5% while global markets were modestly up for the two days.
What's going on here. While at first the issues of the week may have seemed like a one day event, using the ETF's global investors are selling and shorting the indexes in a big way, believing that these markets are now heading down, or gambling as some might say. Local investors in Asia see bargains and have jumped in to take advantage of what they see as an opportunity. That may be a real bad move, at least in the short term.
For now, someone should drag the Thai finance minister onto the golf course for the remainder of the year and not let him near another financial journalist. The Thai Central Bank's moves were naive and misguided in execution but they tried to bail out. The Finance Minister, however, has no idea how to speak publicly. When asked by a British journalist on a Bloomberg video if he had consulted with other Asian finance ministers about these actions he said "No, but they all know me and if you are Asian you understand this. We all do." Well that certainly reassured everyone.
posted by John Borden at 8:57 PM
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