Exchange traded funds have been caught in the fallout of the dramatic decline in Hanergy Thin Film’s share price, as two ETFs with substantial exposure to the company suffered falls in their own shares.
The solar equipment supplier’s shares nose dived on Wednesday after its chairman failed to show up at its annual general meeting. Almost $19bn was wiped off the company’s value, after a two-year run that led to the share price surging 600 per cent.
The effects have seeped into two exchange traded funds that focus on solar energy and found themselves increasingly exposed to the company as its market capitalisation grew. Since Wednesday the price of shares in Guggenheim Solar ETF (TAN) has fallen 9 per cent while Market Vectors Solar Energy ETF has fallen 7 per cent.
Guggenheim Investments said HTF would be dropped from its ETF, in line with plans by the underlying index provider to drop the company after trading in its stock was suspended on Wednesday.
“Guggenheim Solar ETF must track its underlying index. MacSolar, the index provider for TAN, has made the decision to drop Hanergy from its index effective on the close of the date Hanergy resumes trading,” it said.
The downturn is good news for investors who anticipated Hanergy’s tumble, selling borrowed shares in both the listed company and the ETFs on the expectation that the price would fall.
As the cost of borrowing HTF shares soared, investors who wanted to bet against the company turned to the ETFs as an alternative. The cost to borrow shares in the TAN ETF increased from 3.2 per cent of the underlying share price to more than 10 per cent, after the cost of borrowing Hanergy Thin Film shares peaked at over 30 per cent.
The fate of these funds has highlighted the impact of soaring stocks on index-linked ETFs. Both solar ETFs tracked a weighted index of underlying shares. As the company’s price soared, it automatically accounted for a larger percentage of the ETF, making the fund more susceptible to moves when Hanergy’s share price fell.
“What’s interesting about these two funds is they weren’t weighted to Hanergy, Hanergy just grew” said Relte Stephen Schutte, an analyst at Markit.
“The takeaway is that you have to ask how often your ETF is rebalanced. For TAN it was quarterly so they couldn’t really do anything about it. Their hands were tied.”