EGPT: Looming Tracking Error

February 01, 2011

With the Egyptian markets closed and EGPT closed for creations, funny things are happening.

By now, we’ve all seen the news. The Egyptian stock market is closed. In response, Van Eck has halted creations on the Market Vectors Egypt ETF (NYSEArca: EGPT), the only ETF in the world focused solely on the Egyptian market. That means that Van Eck will no longer accept orders to create additional shares of the fund.

In general, we applaud these kinds of actions. EGPT, unlike most ETFs, processes most of its creations and redemptions in cash. When an authorized participant wants to create additional shares of the fund, they send cash to Van Eck. Van Eck then goes into the market and puts that cash to work. With Egypt’s stock market closed, Van Eck can’t put that money to work effectively; therefore, it’s no longer creating more shares of the ETF.

That hasn’t stopped the fund from trading, however. EGPT traded more than 800,000 shares yesterday. More interestingly, it traded up sharply, rising 7.86 percent on the day.

That last bit is interesting because competing funds with significant exposure to Egyptian stocks traded absolutely flat yesterday. The Market Vectors Africa ETF (NYSEArca: AFK), for instance—which has a 21 percent weight in Egyptian shares—closed the day up just 0.03 percent. The PowerShares MENA fund (NYSEArca: PMNA) traded down 0.31 percent on the day.

Why the run?

Well, you could argue that the parts of AFK not invested in Egypt fell enough to offset the sharp rise in Egyptian shares reflected in EGPT. That doesn’t seem to be the case. AFK’s single largest country exposure is South Africa, at 30 percent of the fund. The largest South Africa ETF (NYSEArca: EZA) traded up 1.22 percent yesterday.

 

AFK_vs_EGPT_PMNA_Px

 

Alternatively, you could suppose that EGPT has been artificially bid up in price. With the creation window closed, there are a fixed number of shares of EGPT. If too much demand is chasing those shares, they may drive the price up. In effect, EGPT is a closed-end fund, and investor demand will drive prices up, regardless of fair value.

 

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