Managers urge SGX rethink on ETF pricing

They say the Singapore Exchange’s closing-price mechanism for ETFs can lead to portfolio mispricing, with the issue exacerbated by inactive secondary-market trading.
Managers urge SGX rethink on ETF pricing

Asset managers and exchange-traded fund providers have called on the Singapore Exchange to change its closing-price mechanism for ETFs, arguing it can lead to portfolio mispricing.

At present there are 93 ETFs listed on the SGX, and they are priced according to their last-traded price at the close of a day’s trading.

However, some of these funds might not have traded for weeks, so the argument is the price could be way off prevailing levels of indicative net asset value (iNAV), which is a real-time estimate of a fund’s NAV published throughout the day’s trading.

This iNAV gives investors an idea about estimated fair value before the end-of-day NAV is published. NAV is the official fair price calculated by an ETF manager on trading close of the underlying index.

Asset managers prefer using closing price to NAVs as a way to value ETF assets, with retrieving NAVs on each product on third-party terminals not as easy as finding the final price, notes Marco Montanari, regional head of Deutsche Bank’s db X-trackers ETF unit.

On other exchanges, including Hong Kong, closing prices of ETFs are calculated by taking into account bid/ask prices quoted by market-makers in the last minute of trading before close.

“Because these quotes are continuously updated they reflect movement of the market, even on days when an ETF did not traded,” observes Montanari. “Such closing prices help asset managers, who prefer to use closing prices rather than NAV to make the valuation of their ETF portfolios more efficient.”

Industry sources even hint that if the SGX does not consider changing its closing-price mechanism, investors might consider switching to trade ETFs on other exchanges.

An SGX spokesperson did not respond to AsianInvestor queries by press time on whether it plans to address these concerns.

Bankers on ETF trading desks note that since the last-traded price quoted by SGX is not considered a fair price reflective of the market, some asset managers are choosing to ignore it altogether and use the last bid/ask quote provided by the market-maker instead.

“When market-makers are quoting in the market continuously during the trading day, the bids and offers they quote are always reflective of what the underlying benchmark is worth,” notes Lydia Chan, vice-president of Lyxor Asset Management’s ETF division.

“Hence, taking bid and offer, instead of the last-traded price, would be a better price that is closer to prevailing market conditions.”

Chan agrees that a more representative closing price would ultimately be better for the industry, as it would present a more transparent value of what an ETF is worth. “This will probably encourage more ETF trading activity,” says Chan.

According to the SGX website, ETF market turnover for June dropped 56% to S$350 million, from S$795 million a year ago. Volume traded over the same period dropped 37% to 29 million shares, from 46 million.

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