On July 16, the first batch of Saudi ETFs in China, Huatai-PineBridge CSOP Saudi Arabia ETF (520830) and Southern Fund CSOP Saudi Arabia ETF (159329), were listed and traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange respectively. On July 17, the two Saudi ETFs continued the daily limit trend on the first day of listing, and hit the daily limit again shortly after the opening.

Data shows that as of the morning close of July 17, the two Saudi ETFs were both in the daily limit state, and the premium rate exceeded 15%, ranking the top two in the ETF market, and the cumulative transaction volume exceeded 2 billion yuan. It is worth noting that on July 16, the turnover rate of the two Saudi ETFs exceeded 300%, and the turnover rate fell on July 17.

Source: uSMART SG

Origin and characteristics of Saudi ETF

Saudi ETF tracks the Saudi Index. The Saudi Index is compiled by FTSE Russell. The index adopts a market capitalization weighting method, focusing on the market circulation market value.

The Saudi index consists of more than 60 constituent stocks, all of which are selected through a series of strict screening criteria, including whether they are listed on the Saudi main board, investability, foreign shareholding space and trading liquidity. The index is adjusted every six months to maintain its vitality and representativeness.

The investment areas of Saudi ETF are concentrated in traditional economic industries such as finance, materials, energy, utilities and telecommunications services. The average dividend yield of the top ten weighted stocks of this ETF reaches 3.59%, and it is committed to providing investors with attractive dividend returns and long-term growth potential.

Beware of premium risks

The two Saudi ETFs have maintained a high premium for two consecutive days since their listing. Analysts believe that this phenomenon is mainly due to the large inflow of funds caused by the high enthusiasm of investors for allocation, coupled with the promotion of the T+0 trading mechanism, which has led to the emergence of high-frequency trading. It is worth noting that the premium reflects the short-term rise in market sentiment and also indicates possible fluctuations and uncertainties in the future.

On the afternoon of July 16, Huatai-PineBridge Fund and Southern Fund issued an announcement to remind investors that the secondary market trading prices of the two Saudi ETFs are significantly higher than the reference net value of their fund shares, and there is a premium risk.

It is not uncommon for cross-border ETFs to have high premiums. Industry insiders pointed out that when the market is eager to buy, causing the real-time trading price to exceed the estimated net value of the ETF, the premium will be generated. Due to its characteristics, cross-border ETFs are more prone to large discount and premium fluctuations.

When choosing cross-border ETFs for investment, investors should avoid buying products with too high premiums. Before investing, the premium level of the product should be evaluated. If the premium is too high, you can consider choosing other ETF products that track the same target. At the same time, it is also necessary to judge whether the premium is sustainable. If the premium is only due to short-term overheating of market sentiment, investors can wait for the premium to fall before making a decision.

Future development potential of Saudi ETFs

The performance of the Saudi stock market is also closely related to oil prices. When oil prices rise, the Saudi stock market tends to rise more; when oil prices fall, the Saudi stock market tends to fall less, which is somewhat related to commodities but different.

Since the beginning of this year, crude oil prices have been fluctuating between US$70 and US$90 per barrel (as of 2024/7/12), and the performance of the Saudi stock market has also shown a certain degree of volatility. But even in the shock, the Saudi stock market fell less and rose more. The source of support behind it may be Saudi Arabia's "Vision 2030" plan. From the "Vision 2030" plan, Saudi Arabia will vigorously develop infrastructure, such as the Red Sea New City and the New Future City, which can attract foreign investment on the one hand and directly boost the economy through infrastructure on the other hand. Driven by infrastructure, Saudi Arabia's economy has maintained high growth in recent years.

At the same time, Saudi Arabia has close relations with major economies in the world, creating a good investment environment for it. China has been Saudi Arabia's largest trading partner for many years. Saudi Arabia's relatively relaxed business environment is conducive to attracting foreign investment inflows. All these situations show that Saudi Arabia's economic development is trying to get rid of its dependence on oil.

Investment decision-making suggestions

For individual investors, risk control is always the most important thing when investing in cross-border ETFs. Saudi ETFs are on fire. In the short term, in addition to being wary of premium risks, investors also need to pay close attention to the following factors:

• Crude oil prices. If the global economic slowdown leads to a decrease in crude oil demand, or if crude oil demand decreases due to other reasons, it will definitely affect the performance of crude oil-related companies, and will also affect the investment process and steps of the "Vision 2030", and thus affect the Saudi stock market.
• Geopolitics. The situation in the Middle East is complex and changeable, and we need to pay attention to related risks.
• U.S. monetary policy. Under the influence of inflation, the Federal Reserve may change its monetary policy, such as cutting interest rates. After all, Saudi Arabia is an emerging market, which will have a certain impact on its capital flow.

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