In recent trading days, two specific Exchange-Traded Funds (ETFs) focusing on Saudi Arabia have captured the attention of investors due to their remarkable performance on the Chinese stock marketAs of July 17, both the Huatai-PB Southern Dongying Saudi ETF and the Southern Fund Southern Dongying Saudi ETF experienced a surge in prices, both hitting the upper limit of trading gains, with increases exceeding 20% over just two daysThis trend has sparked considerable excitement, leading to a high premium for these ETFs in the market, prompting the managing companies to issue risk warning announcements.

The background of these funds is noteworthy; they were approved on June 14 and officially launched on July 5. These two ETFs are currently the only publicly offered funds in the market that provide access to the Saudi Arabian capital markets through the Qualified Domestic Institutional Investor (QDII) investment framework

The inclusion of a “T+0” trading mechanism has allowed for immediate buy and sell transactions, significantly enhancing liquidity and market interest.

The Hype and Speculation

Almost immediately after their launch, these ETFs saw an influx of capital as speculators began trading vigorouslyAccording to data from Wind, as of July 17, the premiums on both ETFs were over 15%, and trading volumes exceeded 3.5 billion yuan (roughly 500 million USD) over the past two daysThe turnover rates of these ETFs also reached extraordinary levels, with figures for July 16 showing 307% for Huatai-PB and 427% for Southern Fund’s ETF, with subsequent rates of 200% and 92% respectively on July 17.

The trading dynamics of these two funds indicate an unusual market behavior, characterized by rapid buying and selling activity as investors were seemingly eager to capitalize on short-term price movements

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The concept of "mutual hanging investments" was utilized in these ETFs, meaning that each fund primarily invests in the other’s ETF, specifically focusing on the Southern Dongying Saudi Arabia ETF which tracks the FTSE Saudi Arabia Index and was listed on the Hong Kong Stock Exchange in November of the previous year.

It is important to note, however, that while the Saudi All Share Index (TASI) has traditionally seen upward movement, it showed only a slight increase of 1.11% on July 16, and just a marginal rise of less than 1% on July 17. This disconnect between ETF performance and actual market behavior raises serious concerns about speculative trading practices driven by investor sentiment, rather than underlying asset value.

Given this backdrop, both Huatai-PB and Southern funds have proactively communicated warnings to investors regarding the substantially inflated prices compared to the ETFs' reference net asset values

They cautioned that investors engaging blindly in such high-price environments could face substantial financial losses due to the volatility and unpredictability associated with the trading of these instruments.

The Broader Context of QDII ETFs

This current scenario is not isolated to these two Saudi ETFsA wider trend is emerging among other QDII ETFs, with similar occurrences of elevated premiumsFor instance, various tech-focused ETFs linked to the Nasdaq Composite Index have shown premiums of over 13%. Major funds focusing on investments in U.Sequities, such as those tracking the Dow Jones or S&P 500, have also exhibited premiums exceeding 5%.

Moreover, investment vehicles known as Listed Open-Ended Funds (LOFs) have also been reported to experience high premiumsOne such overseas technology LOF witnessed an intraday gain of over 7%, along with an impressive premium rate surpassing 11%. The fund manager, Huabao Fund, had previously issued risk warnings about the inflated pricing.

An expert in the field elaborated that the current popularity of the Saudi ETFs reflects a bullish sentiment among investors, largely fueled by the QDII framework, which allows domestic investors access to foreign markets but also involves strict limits on foreign exchange quotas