Market Overview

Preparing For The Best And Worst With China ETFs

Preparing For The Best And Worst With China ETFs

The MSCI Emerging Markets Index is up 31 percent year-to-date and China, that benchmark's largest geographic weight, is a primary reason why. However, it is not just the most familiar Chinese stocks trading in Hong Kong and New York that are lifting emerging markets equities this year.


Chinese A-shares, the stocks trading on mainland bourses in Shanghai and Shenzhen are surging as well. For example, the CSI 300 Index is one of the best-performing country-specific emerging markets benchmarks in the world this year.


That could entice risk-tolerant, short-term traders to consider the Direxion Daily CSI 300 China A Share Bull 2X Shares (NYSEARCA:CHAU). Or it could mean opportunity is afoot with CHAU's inverse cousin, the Direxion Daily CSI 300 China A Share Bear 1X Shares (NYSEARCA:CHAD). CHAD is an inverse though not leveraged play on Chinese A-shares. 


Considering The Trades


“China A-shares account for roughly two-thirds of the market capitalization of Chinese stocks,” said Direxion in a recent note. “Until four years ago, there was no direct way for U.S. investors to invest directly in mainland Chinese stocks, which trade on the Shanghai and Shenzhen Stock Exchanges. Since 2013, U.S. investors have been able to access the Chinese market is through A-share ETFs."


Bullishness surrounding Chinese equities sets up short-term trades in CHAU, the US-listed ETF to apply leverage to A-shares. CHAU looks to deliver double the daily returns of the aforementioned CSI 300 Index. There are reasons aggressive, near-term traders should give CHAU a look.


“The surge in the yuan over the past year has also helped increase foreign purchases of Chinese securities,” said Direxion. “And since A-shares ETFs offer a way to access this category without having to perform due diligence on individual companies and/or avoiding the operational issues of investing directly in the market through the Stock Connect, foreign investors are taking notice.”


The Other Side


There is another side to the equation, one that could bode well for contrarians willing to consider CHAD. CHAD seeks to deliver the daily inverse performance of the CSI 300 Index. So if that index falls by 1 percent, CHAD should rise by the same amount.


“Contrarians, read: bears, may be thinking that the bulls are acting more like sheep,” notes Direxion. “A speculative mentality may be just one of the catalysts for a pullback. For many, valuations are starting to appear extended.”


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