Market Overview

Another Point In Favor Of The Inverse A-Shares ETF


On Monday, Benzinga highlighted the Direxion Daily CSI 300 China A Share Bear 1X Shares (NYSE: CHAD) as the need-to-know China exchange traded fund for the day.

CHAD, the lone inverse A-shares ETF trading in the U.S., did not disappoint. After stocks on China’s mainland were drubbed in Monday’s Asian session, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSE: ASHR) and the Market Vectors ChinaAMC A-Share ETF (NYSE: PEK), the larges and oldest, respectively, U.S.-listed A-shares ETFs, sank an average of 9.5 percent, helping propel CHAD to a gain of 8.8 percent on volume that was more than 50 percent above the daily average.

That brings CHAD’s gain since coming to market just over six weeks ago to 24 percent, but wait there’s more. As in more good reasons to consider CHAD, particularly for traders that married to bearish views on A-shares. Put simply, the cost of shorting ASHR is so high that it really is not worth it.

Citing Markit data, Bloomberg reported those bold enough to short ASHR now need the ETF to plunge another 40 percent just to breakeven.

Is it possible that ASHR declines another 40 percent? Sure, but that decline might not be probable, especially with the ETF down almost 20 percent, the definition of a bear market, over the past 90 days. Said differently, the odds of ASHR falling another 40 percent are not enough to take on the risk of shorting the ETF directly when CHAD is available.

CHAD is designed to deliver the daily inverse performance of the CSI 300 Index. The CSI 300 Index tracks what are known as A-shares, the stocks trading in Shanghai and Shenzhen, and serves as the underlying benchmark for ASHR and PEK.

CHAD takes on added allure when noting that options on ASHR also have become pricey in the wake of extended A-shares declines. “Puts protecting against a 10 percent decline in the Deutsche X-trackers Harvest CSI 300 China A-Shares fund cost 1.8 times the price of calls betting on a 10 percent increase," according to three-month data compiled by Bloomberg. "The cost of the bearish options has surged as much as 75 percent in the past three weeks,” said Bloomberg's Belinda Cao.

Even with the costs and risks associated with shorting ASHR, nearly 20 percent of the ETF’s shares outstanding were sold short as of July 27. Of the past 90 days, nine of the 30 worst-performing non-leveraged ETFs are China funds, a group including four A-shares ETFs.


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