Question on trading ETFs - Foreign Indexes

[MarkusJ]

Hello everybody.
The question is how do foreign indexes ETFs (US markets) follow their respective indexes in their regions.
For example, since Europe markets open and start trading before US markets, and if let us say Euro Stoxx 50 has dropped during the day, does that mean that when US markets open later on during the same day, the ETF following Euro Stoxx 50, which is FEZ, will also move down?
The same also applies to iShares EWJ (Japan) or iShares EWZ (Brazil).
Does the ETF mirrors the movement of the country index with time difference between US and that country or region?
Your comments will be appreciated.

 

[just21]

Look at the charts of the index and compare it with the etf. An etf that trades US hours for an international index will be gappy.

 

[Sig]

Hello everybody.
The question is how do foreign indexes ETFs (US markets) follow their respective indexes in their regions.
For example, since Europe markets open and start trading before US markets, and if let us say Euro Stoxx 50 has dropped during the day, does that mean that when US markets open later on during the same day, the ETF following Euro Stoxx 50, which is FEZ, will also move down?
The same also applies to iShares EWJ (Japan) or iShares EWZ (Brazil).
Does the ETF mirrors the movement of the country index with time difference between US and that country or region?
Your comments will be appreciated.

It reflects the best guess of the market as to the actual underlying NAV when the index opens the next day. For example, if Europe closed flat and the S&P jumped 2% after the European markets closed, FEZ will trade for something above it's NAV, which is only reflecting the European close. The S&P and Euro Stoxx 50 aren't correlated 1:1 so it may be more or less than 2% over NAV, from our example above, but it's the market consensus on where it will open the next day. In that way it's really no different from futures that trade after hours on an index whose underlying aren't trading.
Short war story, in the old days you could buy into open end mutual funds when a big bounce had happened in the U.S. after the fund's market had closed for the closing NAV. It was nearly risk-free profit, great while it lasted but some jack-wagons decided to not only take advantage of that but actually get insiders to place their trades after the trade deadline, in some cases after the U.S. markets had closed. That led to a shutdown of the whole thing because when everyone found out about it the funds had to set up limits that make this now hard to do. Amazingly this was a phenomenon that was well published in the literature for literally years before it was shut down, shows you that those "ivory tower" folks can be on to something but so few traders actually read what they have to say that they miss out.

 

[ScalperJoe]

Sig makes a valid point. The issue is regarding the foreign ETF trading at either a premium or at a discount to its NAV.

For example, EWZ states the following in its prospectus (emphasis in bold):

"Shares of the Fund May Trade at Prices Other Than NAV.

Shares of the Fund trade on stock exchanges at prices at, above or below the Fund’s most recent NAV. The NAV of the Fund is calculated at the end of each business day and fluctuates with changes in the market value of the Fund’s holdings. The trading price of the Fund’s shares fluctuates continuously throughout trading hours based on both market supply of and demand for Fund shares and the underlying value of the Fund’s portfolio holdings or NAV. As a result, the trading prices of the Fund’s shares may deviate significantly from NAV during periods of market volatility. ANY OF THESE FACTORS, AMONG OTHERS, MAY LEAD TO THE FUND’S SHARES TRADING AT A PREMIUM OR DISCOUNT TO NAV.

However, because shares can be created and redeemed in Creation Units at NAV, BFA believes that large discounts or premiums to the NAV of the Fund are not likely to be sustained over the long term (unlike shares of many closed-end funds, which frequently trade at appreciable discounts from, and sometimes at premiums to, their NAVs). While the creation/redemption feature is designed to make it more likely that the Fund’s shares normally will trade on stock exchanges at prices close to the Fund’s next calculated NAV, exchange prices are not expected to correlate exactly with the Fund’s NAV due to timing reasons, supply and demand imbalances and other factors."

In other words, EWZ will trade at a premium/discount to NAV, but it won't extend continuously and hence there is no significant "arbitrage" to exploit, unless you are able to perfectly time the day(s) where it will trade significantly below its NAV.

If you click on the link below and then click the chart for "Premium/Discount", it will show you exactly how many days EWZ traded at NAV in the past year. The answer is ONE, just one day where EWZ closed at exactly NAV. The rest were days with fluctuations. The best day to have purchased EWZ was on February 9th of this year, when it was trading at 3.50 below its NAV.

You can do the same research for EWJ (iShares Japan).

https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf#/