Hanergy's share plunge highlights flaws in index-tracking stock funds
ETFs, which track indices passively, are sometimes prone to illiquidity risks
The blistering sell-off in mainland solar firm Hanergy Thin Film Power this week burned several index-tracking stock funds, exposing the flaws in such investment structures, especially in volatile markets like China.
Late on Thursday, one prominent fund announced changes to the index it tracked following Hanergy's almost 50 per cent tumble, suggesting other funds could follow suit and raising more worries for investors who were trapped when trading in the shares was halted on Wednesday.
Guggenheim Investments, which manages about US$200 billion, said the MAC Global Solar Energy Index tracked by its solar exchange-traded fund (ETF) was dropping Hanergy as a constituent, meaning the fund will have to sell its holdings of the mainland firm when shares resume trading.
Critics of ETFs, which mostly track indices passively, say that while such products generally offer more liquidity than traditional funds, they are sometimes prone to illiquidity risks and redemption pressures, especially when a big component in their underlying basket of shares faces a trading halt.
That's especially applicable to the mainland markets, where ETFs have emerged as a popular investment tool. Mainland-focused equity ETF and index assets under management grew more than 75 per cent to US$132 billion in the five years to the end of March.
Over the same period, assets of actively managed mainland focused stock funds shrank 12 per cent to US$199 billion.
"While ETFs are great investment tools, competent active managers could be better equipped to deal with some situations," said Jackie Choy, ETF strategist for fund tracker Morningstar Asia. "Every ETF is different and investors must be aware of the underlying securities and treat them differently."
On Wednesday, shares in Hanergy plunged 47 per cent in less than an hour, wiping US$18 billion off its market worth.
Some of the world's biggest passive money managers, including BlackRock and Vanguard, were part of Hanergy's journey that in two years lifted a little-known small-cap stock to a near US$50 billion solar giant before Wednesday's slide.
