Market Overview

The Right China ETFs For January...Maybe

The Right China ETFs For January...Maybe

Chinese equities started 2016 on an inauspicious note when stocks in Shanghai plunged 7 percent Monday, prompting the closure of equity markets in the world's second largest economy.

That glum start to the new year would seem to indicate the right way to play Chinese stocks is with an inverse exchange-traded fund, such as the Direxion Daily CSI 300 China A Shares Bear 1X Shares (NYSE: CHAD), an ETF frequently mentioned in this space throughout the latter half of last year.

Two New ETFs To Consider

Traders and investors willing to bet that Chinese stocks will rebound (particularly those trading on the mainland and also known as A-shares), can consider a pair of new ETFs. These ETFs are currency-hedged funds, which could prove to be an efficacious way of playing a bounce in Chinese stocks at this time of the year.

Related Link: Fed Mesters Says China Stock Market Correction Not A Concern, China Economic Weakness Not A Significant Risk To U.S. Economy

Those ETFs are the CSOP MSCI China A International Hedged ETF (NYSE: CNHX) and the Deutsche X-trackers CSI 300 China A-Shares Hedged Equity (NYSE: ASHX).

China's recently revealed, heavy-handed approach to managing the value of the yuan could make the ASHX a “right place, right time” ETF. That and there is some potentially positive seasonality at play as well.

“Yuan weakness in January is almost certain. That is simply a consequence of the Chinese New Year festival. The argument is that millions of Chinese tourists spend the seven-day public holiday overseas. As a result, that will boost demand for foreign currency, especially U.S. dollars. In addition, Chinese individuals will get their first opportunity to draw down on their annual $50,000 foreign-exchange quota. The concern this year is that it will be drawn down more quickly given the recent ~5 percent devaluation and market expectations for the yuan to weaken further,” said Rareview Macro founder Neil Azous in a note out Sunday.

ASHX follows the CSI 300 USD Hedged Index, the currency-hedged equivalent of the widely followed CSI 300 Index, which is the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (NYSE: ASHR) underlying benchmark. ASHX follows a methodology that has become popular with some new currency-hedged ETFs in that the new fund has just one equity holding, in this case it is the unhedged ASHR, along with the currency-hedged overlay.

CNHX “aims to capture the performance of the investible domestic Chinese equity universe, including large-cap and mid-cap A-Share stocks listed on both the Shanghai Stock Exchange and the Shenzhen Stock Exchange while neutralizing exposure to the fluctuations of the RMB relative to the U.S. dollar,” said CSOP in a statement.

“January should pick up from where December left off – that is, further weakness in the USD/CNY. According to MNI, every year going back to 2011, USD/CNY dropped in the 31 days leading up to the Chinese New Year holiday, which falls in either January or February,” added Azous.

Image Credit: Public Domain


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