The China A-Share Problem: ASHS

July 24, 2015

The first point I’d make is that ASHS has held up surprisingly well here. Volumes, while not stellar, are averaging more than 100,000 shares a day, making it entirely tradable for most investors. And in general, the price you pay for the ETF in the market has actually born a strong resemblance to what’s being reported as “net asset value.” Most of the time, you would expecteven in a normal marketthat your international ETF actually wouldn’t track its own NAV all that well, because of the difference in time zones.

ASHS, however, is one of a class of ETFs that use “fair market value” practices in calculating NAVs. From their prospectus:

“If a security’s market price is not readily available or does not otherwise accurately reflect the fair value of the security, the security will be valued by another method that the Adviser believes will better reflect fair value in accordance with the Trust’s valuation policies and procedures approved by the Board. “

‘Best Guesses’

That means that even though some of these stocks haven’t traded in almost a year, the fund calculated a “best guess” based on comparable stocks and indexes that are trading. This is a very good thing, generally speaking (and how the entire bond market deals with pricing as well). It’s a very, very good thing when it comes to a crazy, half-closed, less liquid market like China A-share small-caps.

So what happened in the middle of July, when the traded price of the ETF differed significantly from the fair-valued NAV reported by ASHS?

Two things. First, the premium coincided with the maximum number of securities in the portfolio being closed:

On the July 9, less than half of the portfolio in ASHS measured by weight was actually trading. That made the NAV being reported particularly hard for anyone other than the fund's accountants to be sure of, which makes it particularly hard for authorized participants to step in and arbitrage out any differences.

The second point is that this was going on precisely when the shorts were having a field day. Based on Markit’s excellent short data, the spike in premium and collapse in underlying tradability coincided with the height of short-selling.

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