Bet on Surging China Stocks With These Leveraged ETFs

Chinese stocks have been skyrocketing this year, rising to a nine-month high. Logging in the biggest monthly gain since April 2015 in February, the Shanghai Composite Index reclaimed its above 3,000 level on Mar 4 for the first time since June 2018. With the current rally, the index is up about 23% since its Jan 3 low and added nearly $1.5 trillion in value to China’s stock market.

Below, we have highlighted some reasons for the outperformance that will likely continue in the near term.

Potential Trade Deal

The optimism over the trade deal with the United States has been the biggest catalyst behind the rally. Washington and Beijing are close to striking a deal as early as this month to end the nearly one-year tariff war. According to the Bloomberg News and The Wall Street Journal, China offered to ease tariffs and other restrictions on U.S. farm, chemical, auto and other products. Meanwhile, Washington is considering removing most, if not all, sanctions on Chinese imports placed last year (read: US-China Close to a Trade Deal? High-Beta & Risky ETFs to Tap).

MSCI Inclusion of Chinese Stocks

The MSCI move has instilled further confidence in Chinese stocks. The global index provider will quadruple the weighting of Chinese mainland shares (A-shares) from the current 5% to 20% for a number of its indexes, most notably the MSCI Emerging Markets Index in three phases — 10% in May, 15% in August and 20% in November. MSCI added 236 China-listed large-cap stocks to its Emerging Markets Index in 2018. Notably, Chinese A-shares were included in the MSCI Emerging Markets Index for the first time last year.

MSCI will also add 168 new mid-cap stocks in November and include 27 shares listed on the tech-heavy ChiNext board for the first time. On completion of the full implementation, the weighting of Chinese stocks in the MSCI Emerging Market Index will jump to 3.3% from the current 0.7 as the index will include 253 large-cap and 168 mid-cap China A-shares (read: China A-Shares ETFs to Roar Higher on MSCI Move).

The move will likely trigger more than $80 billion of fresh foreign inflows into the world's second-biggest economy, per the index provider.

Stimulus & Reforms

Though the Chinese economy expanded 6.6% - the slowest rate since 1990 - last year, the slew of Beijing’s economic policies are likely to revitalize growth in the world's second-largest economy, raising the appeal for these stocks. Policymakers have promised to cut taxes, increase infrastructure spending for this year, and improve liquidity of the Chinese financial system in response to slowing growth.

Among the notable measures, China’s central bank cut its reserve requirement ratio (RRR) for the fifth time early this year and offered financial institutions $83 billion in liquidity as part of a wider economic stimulus. The bank signaled more stimulus measures in the near term. The lifting of some trading curbs and deeper reforms in the finance sector also added to the enthusiasm. Moreover, depressed valuations have also encouraged investors to charge up at lower levels (read: Will the Year of Pig Shower Fortunes on China ETFs?).

How to Play

Amid bullishness, many investors have turned confident on China stocks and are seeking to tap this opportunity. For them, a leveraged play on the stocks could be an excellent idea as these could see huge gains in a very short time frame when compared to the simple products.

Below we have highlighted several leveraged ETFs and the key differences between them:

Direxion Daily China 3x Bull Shares ETF YINN

This product provides three times exposure to the FTSE China 50 Index, which consists of the 50 largest and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange. It charges annual fee of 97 bps and has AUM of $417.3 million. The fund trades in a heavy volume of around 2.8 million shares and has gained 42.5% so far this year.

Direxion Daily CSI 300 China A Share Bull 2X Shares CHAU

This product offers two times the exposure to the CSI 300 Index, charging investors 95 bps in annual fees. It has AUM of 117.5 million and average daily volume of 294,000 shares. The ETF is up 65.5% this year (read: Leveraged ETFs That Soared More Than 50% in February).

Daily CSI China Internet Index Bull 2X Shares CWEB

This fund offers twice the leveraged exposure to the Chinese Internet market by tracking the CSI Overseas China Internet Index. It charges an annual fee of 95 bps and trades in a moderate average daily volume of about 97,000 shares. The fund has accumulated AUM of $73.1 million and has gained 53.3% in the same time frame.

ProShares Ultra FTSE China 50 ETF XPP

This fund provides two times leveraged exposure to the daily performance of the FTSE China 50 Index. It is an unpopular and illiquid choice in the space with AUM of $30.4 million and average daily volume of 9,000 shares. Expense ratio comes in at 0.95%. The fund has added 27.3% since the start of the year.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all Leveraged Equity ETFs here).

However, for ETF investors, who are bullish on the Chinese stocks for the near term, either of the above products could make an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that “trend is the friend” in this corner of the investing world.

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