(Yicai) July 17 -- The first two Saudi Arabian exchange traded funds to be traded in China surged by the exchange-imposed limit yesterday, the day they were launched, and again today as the two ETFs that track the FTSE Saudi Arabia Index prove very popular among investors.

The ETF issued by Southern Fund Management [SHE:159329] closed up 10 percent at CNY1.187 (USD0.16) today and the ETF issued by Huatai-PineBridge Huatai-PineBridge Fund Management [SHA:520830] finished the day up by the same amount at CNY1.186.

The two Saudi ETFs were trading at a premium rate of more than 15 percent as of noon today, the highest in the ETF market, according to financial data provider Wind. They had racked up a cumulative trading volume of over CNY2 billion (USD275.3 million). The turnover rate of Huatai-PineBridge’s ETF was close to 200 percent, and that of Southern Fund's ETF was close to 100 percent.

To meet surging demand, the two ETFs tripled their subscription ceiling to 150 million shares today from 50 million yesterday, according to data from the Shanghai and Shenzhen bourses.

Huatai-PineBridge and Southern Fund, which are Qualified Domestic Institutional Investors or Chinese financial organizations that have permission to buy overseas securities, both issued risk warnings yesterday saying that the trading prices of the two Saudi ETFs were significantly higher than the net value of the funds’ portfolios and reminded investors to be aware of the risks associated with high transaction prices in the secondary market.

Due to subscription caps and great investor enthusiasm, it is easy for cross-border ETFs to have high premiums, industry insiders said. Therefore, some fund managers may allocate additional foreign exchange quotas to raise the subscription ceilings on popular ETFs to prevent high premiums.

When the index tracked by a cross-border ETF performs well, this can trigger investor enthusiasm and accelerate inflows in the short term, creating a premium phenomenon, said Liu Jun, general director of the index investment department at Huatai-PineBridge.

Newly launched ETFs are likely to be in short supply due to their small size, Liu said. This together with the T+0 trading mechanism, which is when trades are settled on the same day, and the quota limits for QDII ETFs further increase the possibility of high-frequency trading. This pushes up premiums which reflects investors’ strong interest in investing overseas.

When choosing cross-border ETFs, investors should try to avoid buying high-premium products, Liu added.

Editor: Kim Taylor