Political unrest in the Middle East and Japan's natural and
nuclear disasters have raised questions about how exchange traded
funds (ETFs) operated through these crises.
The complex drama in
Van Eck's Market Vectors Egypt Index ETF (NYSEArca:
while Egypt's stock market was closed for seven weeks provided a
The fund continued trading while Egypt's market was shuttered
and the portfolio managers used so-called fair-value pricing to
determine net asset value (
The NAV for the Egypt ETF "changed throughout the long period of
market shutdown, indicating that fair value pricing likely was
being used - though ascertaining 'proper' prices for some Egyptian
stocks that hadn't traded in weeks couldn't have been easy,"
writes Morningstar's Gregg Wolper
in a Fund Spy column this week.
Edward Lopez, Van Eck's marketing director, confirmed the
company determined fair value for the portfolio while Egypt's
market was closed. ETFs disclose estimates of their NAV every 15
seconds during the trading day.
During an interview this week on the sidelines of IMN's 2
Annual World Series of ETFs & Indexing conference in Boston,
Lopez explained Van Eck can look at factors such as the movement of
the Egyptian pound, other markets and correlations as well as news
and material events. Also, some of Market Vectors Egypt Index ETF's
holdings are listed in London and Canada.
Egypt closed its stock market in late January with the last
trading taking place on Thursday, Jan. 27. The Egyptian market is
typically closed on Friday and Saturday, but is open on
Over the weekend, authorities said the market would not open
Sunday, Jan. 30, amid protests calling for the ouster of Hosni
Mubarak, Egypt's president.
However, Van Eck had accepted investor cash on Friday, Jan. 28,
and was unable to put that money to work.
On Monday, Jan. 31, Van Eck announced the Egypt ETF was halting
the creation of new shares, although it would honor redemptions.
Shares of the ETF continued to trade on the secondary market while
Egypt's stock market remained closed.
However, the temporary suspension of share creation resulted in
the ETF trading similar to a closed-end fund. A premium of over 10%
to NAV developed and at times reached the 20% range.
[Egypt ETF Trades At Premium Over NAV.]
The premium to NAV reflected buyer demand for the ETF but also
added an extra risk for traders not normally associated with
Market Vectors Egypt Index ETF resumed creations last week as
Egypt's market finally reopened, despite a quick plunge that
triggered exchange circuit breakers.
[Egyptian Market Opens: What About The ETF?]
The premium to NAV was reduced as "the arbitrage mechanism
kicked in," Van Eck's Lopez said as the reopening of the Egyptian
stock market allowed ETF market makers to arbitrage away price
Still, the premium was 2.8% as of March 29, according to Van
The ETF's cash position is below 1% with Egypt's market back
open and Van Eck able to deploy the roughly 40% cash stake that had
built up while the market was closed.
Assets in the Egypt ETF have risen to $57 million while trading
volume has exceeded 1 million shares on three occasions so far in
2011. Before the crisis hit, the ETF rarely traded more than
Lopez at Van Eck said the ETF did what it was supposed to do
while acting as a "price-discovery mechanism for Egypt" while the
underlying market was closed.
"A crisis creates both opportunities and risks," he said.
Market Vectors Egypt Index ETF was down 19.3% year to date as of
Tuesday's close, according to Morningstar.