After a lengthy closure, the Athens Stock Exchange is expected to reopen on July 19. Investors looking for a guide as to how the Global X FTSE Greece 20 ETF (NYSEArca: GREK) will behave once stocks there reopen should look to how the Market Vectors Egypt Index ETF (NYSEArca: EGPT) acted in the wake of Arab Spring of 2011.
Back then, Egyptian markets were shut down for two months, leaving EGPT as the sole price discovery mechanism available to U.S. investors seeking exposure to Egyptian equities. A similar scenario has emerged with GREK. The Athens Stock Exchange has been closed for several weeks and soon after its closure, Societe Generale’s Lyxor unit suspended trading in its Germany-listed Greece ETF, leaving GREK as the primary price discovery tool for Greek stocks. [Greek Drama Extends as Greece ETF Flirts With new Lows]
“When Cairo’s exchange was closed for almost two months during the Arab Spring uprising, speculators used a U.S.-listed security as a way of estimating where Egyptian equities would open once trading resumed. Turned out they were a little off: while the ETF slipped about 1 percent during the suspension, it plunged 8.1 percent after the exchange reopened,” reports Inyoung Hwang for Bloomberg.
GREK plunged 19% on June 29, but the ETF has since surged nearly 14%. Today, GREK, the lone Greece ETF, is off 4.6%, making it the day’s worst-performing ETF on a percentage basis. Volume in GREK has been surging. The ETF “has traded about 3.4 million shares on average daily since the exchange closure, more than twice the volume in the prior month,” according to Bloomberg.
In domestic equity ETFs, the NAV works as intended. The NAV provides a fair value of the ETF, which basically means the fund is trading in line with its underlying assets with little or no tracking error. This also allows investors to get a better view of whether or not they are over or underpaying an ETF.
When the ETF’s price is lower than the NAV, the ETF is said to be at a “discount” – the ETF is valued less than the fund’s overall holdings. If the ETF’s price is above the NAV, the ETF is said to trade at a “premium” – the ETF is trading higher than what the underlying holdings are worth. [Premiums & Discounts]
However, the NAV gets cloudier when looking into other markets. For instance, international markets are not open in the same time zone as U.S. markets, but foreign stock and bond ETFs are still trading on U.S. exchanges. Since the NAV is taken based on the last price at which it was traded, the NAV may not move during normal hours. Consequently, the NAV for international ETFs, along with most commodity and fixed-income funds, may represent a stale number as these markets don’t necessarily trade during normal U.S. market hours.
Something else to consider when it comes to the EGPT/GREK comparison: Market closures, which equate to lack of market accessibility, draw the ire of index providers. As Bloomberg notes, index provider MSCI was far from pleased about stocks in Cairo being closed four years ago.
Last year, Russell Indexes, now part of FTSE Russell, demoted Egypt to frontier markets status from emerging markets classification. Last month, MSCI said it is considering a similar demotion for Egypt.
Greece is at risk of an even more dubious demotion. In November 2013, MSCI demoted Greece to emerging markets status from the developed market classification. Now, the index provider is mulling a demotion that would send Greece to the ominous “standalone” market classification. Assuming MSCI moves forward with such a demotion, that means Greek stocks would be expelled from the MSCI Emerging Markets Index and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), skip over the iShares MSCI Frontier 100 ETF (NYSEArca: FM) and head straight to standalone status. [Greece Could Face big Index Demotion]
The last country MSCI demoted to standalone status was Venezuela in May 2006. If Greece earns that dubious market classification, it would join the likes of Botswana, Ghana, Jamaica and Zimbabwe in standalone territory, according to MSCI.
Tom Lydon’s clients own shares of EEM.