Question on ETFs of other countries

[Sky123987]

Why is it if you buy the Italian, Brazilian, Chinese... etc ETFs... you will often find that they are tied to how the US market does and NOT their native market.

I remember when we had a big down day, all these ETFs of other countries (my list of 20) were down, yet there were 5 or so countries market index closed +.

Why does the ETF not track it's countries S&P?

Thanks

 

[yayt]

I believe it's because, for some countries, arbitrage is not possible because of foreign direct investment rules not allowing arbitrageurs to purchase the underlying ETF portfolio.

I.E. if the ETF is overvalued, one should, in theory, short the ETF and long the underlying, until the gap closes.

But since arbitrage is not possible, and the ETF is subject to supply and demand, the market price will not (and usually does not) equal the NAV.

 

[Sky123987]

Quote from yayt:

I believe it's because, for some countries, arbitrage is not possible because of foreign direct investment rules not allowing arbitrageurs to purchase the underlying ETF portfolio.

I.E. if the ETF is overvalued, one should, in theory, short the ETF and long the underlying, until the gap closes.

But since arbitrage is not possible, and the ETF is subject to supply and demand, the market price will not (and usually does not) equal the NAV.

that is very interesting.

So when you buy the ETF say from Brazil, what are you actually buying? Actual Brazilian shares of companies? or just shares that "represent" Brazilian shares

I just find it so weird how the ETF barely represents what it is suppose to represent @ all

 

[cvds16]

if the markets are closed at that time, it could be that the ETF is allready taking into account the effect of the lower stock market in the USA and the effect this will have on the local market when it opens again. So they are anticipating things ...

 

[Sky123987]

Quote from cvds16:

if the markets are closed at that time, it could be that the ETF is allready taking into account the effect of the lower stock market in the USA and the effect this will have on the local market when it opens again. So they are anticipating things ...

good point, but if China closed up 2%, and the US opened flat you'd expect the ETF to gap up 2% and follow the US mkt

 

[yayt]

Quote from Sky123987:

that is very interesting.

So when you buy the ETF say from Brazil, what are you actually buying? Actual Brazilian shares of companies? or just shares that "represent" Brazilian shares

I just find it so weird how the ETF barely represents what it is suppose to represent @ all

Take a look at the difference between an etn (exchange rraded note ) and etf - that will answer all your questions

 

[prince-in-jail]

Quote from Sky123987:

Why is it if you buy the Italian, Brazilian, Chinese... etc ETFs... you will often find that they are tied to how the US market does and NOT their native market.

Buy them at their local exchanges. I own some of iShares Nikkei and bought them directly at the Tokyo Stock Exchange. They move just like the index. An up day in the Nikkei is an up day for my portfolio and vice versa.

If you look at the big picture, however, the world still looks at Wall Street and therefore many markets including Europe and Asia are tightly correlated to what happens in the US.

Currencies could be another reason for the deviation:
http://seekingalpha.com/article/4801-why-the-disparity-between-nikkei-and-japan-etf-etf-ewj

 

[robbie380]

have you ever been to ishares.com?

 

[Cutten]

Quote from Sky123987:

Why is it if you buy the Italian, Brazilian, Chinese... etc ETFs... you will often find that they are tied to how the US market does and NOT their native market.

I remember when we had a big down day, all these ETFs of other countries (my list of 20) were down, yet there were 5 or so countries market index closed +.

Why does the ETF not track it's countries S&P?

Thanks

They do track the indices. It's just that when the S&P is down, most foreign markets go down too. If the foreign market is closed, the ETF will fall with the S&P because people are anticipating the foreign markets to fall in reaction.

Contrary to what another poster said, you can arbitrage ETFs vs domestic stocks.

Can you show me any ETFs that are out of whack with their underlying stock constituents or indices?

 

[TheStudent]

Quote from yayt:

I believe it's because, for some countries, arbitrage is not possible because of foreign direct investment rules not allowing arbitrageurs to purchase the underlying ETF portfolio.

This is incorrect.

ETFs are created when one submits a sufficiently large block of the underlying portfolio to a trust and the trust then turns around and issues ETF units back.

Those units then get traded.

There are no rules that say if you own the ETF you cannot trade the underlying. To the contrary - one MUST be allowed to have positions in both for the product to succeed.

Without arbitrage, the faith of the general public that the ETF will perform in line with the underlying will be rightly questioned and the product will fail.