GRE: Where Are You When We Need You?

Calling all the investors who have poured more than €200 million into the Greek equity ETF in Europe – you thought you had a liquid investment. Think again.

Recent turmoil in Greece has certainly shone a spotlight on ETFs that are tracking its equity markets and has highlighted the different ways in which these funds can operate, depending on their issuer and where they are listed.

Greece, in a build-up of economic and political tension, shut its banks and stock exchange on 29 June to stem outflows, presenting a potential problem – or arguably, a window of opportunity – for Greek equity ETFs.

While the Global X FTSE Greece 20 ETF (GREK) has continued to trade in the U.S., the Europe-listed Lyxor UCITS ETF FTSE Athex 20 ETF (GRE) has been closed to trading – and not just to creations and redemptions, but to TRADING altogether. First, it was closed in Italy and France, but the German stock exchange was quick to follow suit.

So, you own GRE and want to sell it? Sorry, no can do. Looking for access to the Greek market in a time of crisis? Can't help you!

The word from Lyxor is that it was not them but the exchanges who halted trading.  I have just one question for the European exchanges: Why? Who is well served by halting trading altogether? This fund has the opportunity to be the only game in town, to be a window on a market that is otherwise closed – to be what ETFs are at their best! So why have you closed GRE to trading?

A statement from the provider for ETF.com, issued on 8 July, read: “The Lyxor ETF tracking Greece Equities is not trading as the Greek market is closed. Given that ETFs are ultimately a wrapper, liquidity of an ETF comes from the underlying market. As there is no underlying market open at the moment in Greece, Lyxor Asset Management is not able to create or redeem shares on the primary market.”

However, there is plenty of precedent for ETFs to play this kind of role i.e. adding transparency and liquidity to markets where none is coming from other sources. I can understand creation and redeption activity being closed if the underlying market is closed, but that does NOT mean that that secondary market trading activity needs to be or indeed should be closed.  History is filled with examples of ETFs stepping in to play the role of adding transparency to otherwise closed markets.

First, there was the 1997 Asian financial crisis. The iShares MSCI Malaysia ETF (EWM), first issued as WEBS, continued to track the market. Then there was Egypt, which closed its market on 28 January 2011, following a revolt against its President Hosni Mubarak, which caused the benchmark index to plunge by more than 16 percent in two days. And yet the Market Vectors ETF (EGPT) continued to trade.  Even in China today, where some 14,000 companies have ceased to trade in order to stem panic selling, the Chinese ETFs are still trading in Asia, the U.S and in Europe.

In all of these cases, capital markets are closed, and currency markets are closed - and yet there is the ETF – a beacon of transparency, making the currency market or reflecting the black market. Yes, an investor may well be trading at fantastic premiums and discounts, but that hardly matters when there is no other source of price discovery.

My money will always be where the money is invested. Given the choice between being able to get in and out of an ETF and its underlying market, at a price I can choose to accept, or being stuck in a fund and not being able to trade at all, I will take the first option every time.

So let's get that fund trading and allow GRE to live up to its higher calling of being a financial instrument which is able to provide a window into the Greek market, even during the most dire of circumstances.