After all, the Global X FTSE Greece 20 ETF (GREK - News) does a pretty mediocre job of canvassing the southern European country’s equities market.
At a cost of 55 basis points, GREK attempts to reflect the performance of the 20-largest securities listed on the Athens Stock Exchange.
The reality of the situation is that investors are left with a ridiculously top-heavy fund that does little to represent the broad list of securities held on the Athens Stock Exchange.
GREK, which is still quite small at $2.82 million in assets, is based on the FTSE/ATHEX 20 Capped Index. The index basically selects the top 20 firms by market capitalization listed in Athens.
A quick look at GREK’s holdings immediately shows some obvious flaws.
A local Coca-Cola bottling division—Coca-Cola Hellenic—makes up nearly 20 percent of the fund. The National Bank of Greece comes in at a distant, but not insignificant, second—accounting for 13 percent of the fund.
In third place is Opap SA—Europe’s largest betting company, which organizes and manages bets on sporting events and lottery games.
My intention isn’t to go off on the quality of the top three holdings.
After all, they are the largest listed on the Athens Exchange. My real problem is the lack of depth and diversity within the fund. Simply put:55 basis points is a lot to pay for a scrape off the top.
Even worse is when you consider the one benefit that should result from such a top-heavy portfolio—investability.
Ideally, the securities held in GREK should be incredibly liquid and available. Unfortunately, that’s not exactly the case.
A quick look at the underlying calculation basket gives you a clearer idea of GREK’s liquidity issues.
When looking at the 30-day average trading volume for each underlying constituent in comparison with the shares of each constituent per creation unit, all but three holdings can account for more than 1 percent of average daily trading volume.
Imagine if you wanted to purchase a creation unit of GREK (50,000 shares)—something that amounts to a $500,000 transaction.
If you did it the right way, you’d likely call up an authorized participant who would create on your behalf after acquiring the underlying constituents and delivering them to Global X in exchange for shares of GREK. The AP would then pass those ETF shares on to you for a small fee.
The thing is that the slippage and market impact of such a transaction is astronomical in comparison with most ETFs.
If one were to initiate a block trade for one creation unit in GREK, the AP would have to deliver 6,315 shares of Coca-Cola Hellenic to the fund—a position that accounts for nearly 20 percent of the average daily volume in the stock.
On a weighted average basis, one creation unit size execution would account for somewhere around 13 percent of the daily volume in the underlying constituents.
The market impact that results from executing such a transaction gets directly passed down to the investor.
In essence, a case can be made that GREK may be one of the scenarios where there’s a huge potential for the tail to wag to dog. Unfortunately, it’s investors who are left holding the bag.
GREK benefits from being the first Greece-focused ETF to market, but investors deserve better.
I’d much rather have a fund that tracks the Athens Stock Exchange General Index, giving me greater access and diversity to the listings currently available in Greece, even in the face of liquidity issues. Because, let’s face it, it’s not as if those issues are nonexistent in the present scenario.
Unsurprisingly, GREK has done a poor job mimicking the returns of the broad Athens Stock Exchange Index. Since its inception in early December, GREK has returned -32.16 percent, while the Athens Stock Exchange General Index has returned -21.73 percent in the same period.
In the end, what I’m saying is this:Whether you’re thinking about going short or long the Greek ETF, just be sure you know what you’re getting into.
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