In part 1 of our commentary, we discussed the current Fundamental Gravity of our “Slowing Drag...
The Ups and Downs of the Egypt ETF
03/28/2011 10:59 am EST
The closure of the Egyptian market amid popular uprising halted new orders for the country's tracking ETF. Now back online, we examine the impact and how the fund is aiming to regain its footing.
Van Eck announced on Wednesday (Mar. 23) that it has resumed accepting creation orders for the Market Vectors Egypt Index ETF (EGPT) nearly two months after the issuer halted the issuance of new shares in the wake of a closure of the Egyptian Stock Exchange.
The re-opening of the Egyptian Exchange was announced and delayed several times as the country has struggled to return to stability since the ouster of longtime president Hosni Mubarak.
The prolonged shutdown of the market caused anxiety among investors and prompted some index providers to reevaluate Egypt’s inclusion in emerging-market benchmarks.
If Egypt’s stock exchange hadn’t opened by Thursday (Mar. 24), the length of the closure would have triggered an automatic review from MSCI, the provider behind many of the indexes linked to popular emerging markets ETFs.
Egyptian stocks sank in last Wednesday’s trading immediately after the opening bell. Trading was suspended 16 seconds into the day when the broad EGX 100 benchmark hit a 5% “circuit breaker.”
In the days leading up to the market’s reopening, financial regulators had established a set of rules designed to facilitate an orderly return to normal operations. Trading resumed 30 minutes later, and indexes finished the day down by about 9%.
Egypt ETF: Case Study in Exchange-Traded Nuances
Van Eck suspended creations of EGPT on the last day of January, as the shutdown of the market in Cairo prevented the company from deploying capital and maintaining exposure to the underlying index.
Because EGPT maintains a cash creation, authorized participants are, under normal conditions, able to deliver cash in return for shares of the ETF. As interest in establishing exposure to Egypt spiked after the protests broke out, Van Eck was flooded with creation requests. Because the markets shut down before the issuer was able to deploy the capital received, EGPT has been carrying a significant cash balance; cash recently made up more than 40% of the fund’s assets.
EGPT closed that Tuesday at a premium of about 12% to its net asset value (NAV). Since the market closed its doors, the fund has traded consistently above its NAV, and the premium at one point topped 20%.
Though trading in securities listed on Egyptian exchanges had been halted, EGPT remained incredibly liquid. Average daily trading volume in February exceeded 425,000 shares, and topped one million shares on multiple occasions.
EGPT was one of the few options available for investors looking to achieve exposure to Egyptian equities, and the ETF became a flexible tool for investors looking to trade on new developments impacting the outlook for the Egyptian economy.
EGPT sank in Wednesday trading, as the re-opening of Egyptian exchanges finally allowed the arbitrage mechanism designed to keep ETF prices in line with NAV to function properly. According to Van Eck’s Web site, EGPT closed Wednesday with assets of about $23 million, approximately the level maintained when the fund halted creations in January. The cash position in the fund had been reduced to just under $1 million, or about 4% of assets, suggesting that the fund manager was active in realigning the ETFs holdings with the composition of the target index on Wednesday.
The premium in the Egypt ETF had collapsed considerably once trading resumed in Cairo. EGPT closed Wednesday at a premium of about 2.3%, considerably lower than the disconnect to NAV throughout prior weeks.
The NAV of the fund increased slightly on Wednesday, though that metric is somewhat distorted in that it represents the change in value of the underlying securities relative to the last time a “live” price was established. The share price declined about 8% on the day, bringing the two sides closer together.
It is not uncommon for international equity ETFs to exhibit premiums or discounts to NAV; this phenomenon can be the result of the disconnect in trading hours of the exchange traded products and the underlying securities.
By Michael Johnston of ETFdb.com
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