Market Overview

Despite All The Commotion, Delisting Controversy Not Taking Toll On Leveraged China ETF

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While the New York Stock Exchange had a hard time making up its mind regarding the listing fate of several of Chinese telecom companies, some index providers aren't playing around.

What Happened

On Thursday evening, FTSE Russell and MSCI, two of the largest sponsors of indexes used by issuers of exchange traded funds, announced the removal of some Chinese telecom companies from their benchmarks.

Add to that, next Monday, the “Executive Order on Addressing the Threat from Securities Investments That Finance Communist Chinese Military Companies” signed by President Trump goes into effect.

Combine those scenarios and it would be reasonable to expect these would be go-go days for the Direxion DailyFTSE China Bear 3X Shares (NYSE: YANG). In reality, it's YANG's bullish counterpart, the Direxion Daily FTSE China Bull 3X Shares (NYSE: YINN) that's looking appealing.

Why It's Important

YINN, which attempts to deliver triple the daily performance of the FTSE China 50 Index, is higher by almost 7% over the past week, indicating an arguably surprising level of immunity to the China delisting controversy.

Still, there could be some reconfiguring in store for YINN's underlying index if more Chinese companies draw the ire of U.S. regulators and the major index providers.

“Major international index providers completed their consultation processes and announced their plans,” according to Morningstar. “The major benchmark providers will exclude the securities listed by the Office of Foreign Assets Control, or OFAC, from their equity and fixed-income indexes. Any index funds and exchange-traded funds whose benchmarks will be excluding the affected securities will follow suit.”

Conversely, YINN could be in style for much of this year because analysts and asset allocators are bullish on emerging markets equities and its hard to extol that point of view while being on bearish on China – the largest developing economy.

What's Next

Given the fluidity of the listing situation, the bearish YANG may have its moments over the near-term, particularly if the scope of the aforementioned executive order is widened.

“However, the interpretation of the executive order remains fluid. On Dec. 31, 2020, the New York Stock Exchange announced plans to delist the ADRs of three Chinese telecom companies,” notes Morningstar. “It put this on hold Jan. 4, 2021 but reverted to its original plan on Jan. 6. The latest guidance from the OFAC, issued on Jan. 6, explicitly stated three NYSE-listed ADRs and subsidiaries of the military companies were subject to the executive order. As such, we expect that international index providers will make further announcements in the days to come.”

 

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