Country ETFs in New York: why they can overreact while the home market sleeps
A study of Asian and European country ETFs finds that, once the home market closes, they track the S&P 500 more than their own stocks, and part of that move looks like overreaction.
The question
A country ETF listed in New York holds stocks from another country, so its price should follow those stocks. But what happens when the home market is closed and only New York is trading? The ETF keeps moving, and it has to take its cue from somewhere.
What the research found
Levy and Lieberman (2013) studied iShares ETFs for Asian and European markets with intraday prices from roughly 2000 to 2010. European ETFs, whose home markets overlap with the first hours of New York trading, followed the value of their own holdings while Europe was open. Once Europe closed, the S&P 500 took over as the main driver.
Asian ETFs, whose home markets are shut during the whole US session, were driven mostly by the S&P 500 throughout the day.
The authors then compared how strongly the S&P 500 moved the ETFs during the day with how strongly it moved the underlying foreign indices the next day. The effect on the ETFs was roughly twice as large, which they read as overreaction. Much of the gap between the ETF price and the value of its holdings was closed at the next US open.
Brazil was not part of the sample, and B3 shares far more trading hours with New York than Tokyo or Frankfurt do.
Food for thought for the Ibovespa open
A price is not a forecast by itself. An ETF that trades while its home market is closed reflects what US investors will pay at that moment, which partly mirrors the mood of the US market.
Timing decides which signal dominates. While both markets are open, arbitrage keeps the ETF close to its holdings. When only one of them is open, that link loosens, and those are the hours where the effect matters most.
Overreaction is a reason for caution, not a rule. The study measured an average pattern for other countries over one decade. Whether a Brazil ETF behaves the same way on a given night is an open question.
References
- Levy, A. & Lieberman, O. (2013). Overreaction of country ETFs to US market returns: Intraday vs. daily horizons and the role of synchronized trading. Journal of Banking & Finance, 37(5), 1412–1421.
Summaries are written in our own words. The studies cited do not evaluate or endorse Up or Down BR. Not investment advice.
All research notes