ETF How do foreign index ETFs like VGS work?

Discussion in 'Shares & Funds' started by Simon Hampel, 4th May, 2022.

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  1. Simon Hampel

    Simon Hampel Founder Staff Member

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    I've been watching the movement of VGS recently and have been scratching my head to understand how foreign index tracking ETFs like this actually work from a pricing perspective?

    Given a large portion of their shares are traded on foreign exchanges which are often not trading during our Australia trading day, what is causing the intra-day movement in share prices on these funds? Is it just supply and demand?

    I understand how market makers work in creating liquidity for a fund and that intra-day prices fluctuate based on supply and demand - but what is the relationship between the NAV and the share price on an ETF where there are presumably few changes in NAV during our Australian trading day when foreign exchanges are closed?

    Does anyone understand the mechanics at work here?
     
    Simon Hampel, 4th May, 2022
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  2. Trainee

    Trainee Well-Known Member

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    NAV can change due to after hours trading of US shares and futures, ADRs or similar traded on other exchanges, FX rate changes (VGS is unhedged) and straight up supply and demand?
    Similar to how the ASX is impacted by US futures trading.
     
    Trainee, 4th May, 2022
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  3. Brumbie

    Brumbie Well-Known Member

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    Exactly. This is my understanding of it as well. Futures market and exchange rate.
     
    Brumbie, 4th May, 2022
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  4. carfield

    carfield Well-Known Member

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    VGS is 65pct or so SPX and e-mini futures on spx trade 23hrs a day so that is 2/3 of moves. eurostox and ftse futures are available during most of asx hours.
     
    carfield, 4th May, 2022
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  5. Trainee

    Trainee Well-Known Member

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    As a fun prediction (no advice here!) the us markets moved up 3% overnight, but the aud also moved up 2ish%.

    so in theory vgs should be fairly flat on the open. At least it shouldnt jump. Tho it would be interesting to see what VGAD does on the open.
     
    Trainee, 5th May, 2022
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  6. Trainee

    Trainee Well-Known Member

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    Pretty much as expected. VGS is up 0.6% and VGAD up 2% around now.

    So VGS takes into account the loss from stronger AUD.
     
    Last edited: 5th May, 2022
    Trainee, 5th May, 2022
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  7. Brumbie

    Brumbie Well-Known Member

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    So VGS would outperform in a risk off environment with the dollar falling cushioning the effect of the market falling. In theory anyway.
     
    Brumbie, 5th May, 2022
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  8. Trainee

    Trainee Well-Known Member

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    That assumes the AUD falls in a 'risk off' environment.
     
    Trainee, 5th May, 2022
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  9. carfield

    carfield Well-Known Member

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    i hate ccy exposure, betting on next day or week FX move is as futile as horse betting. However i do believe over long term ccy do mean revert, so judging by 0.6-1.1 range we saw in audusd fx last 2 decades, currently we are at lower bound so it make sense to invest in VGAD over VGS. the additional "cost" is ntg really in grand scheme of things.
     
    carfield, 5th May, 2022
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  10. Trainee

    Trainee Well-Known Member

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    Though for diversification it might make sense to have unhedged foreign currency assets. If the aud falls significantly say.
     
    Trainee, 5th May, 2022
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  11. SatayKing

    SatayKing Well-Known Member

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    SatayKing, 6th May, 2022
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