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New Way to Short China

Index Intelligence: A New Way to Short China

Tuesday November 13, 4:45 pm ET

ProShares, a unit of fund manager ProFunds, recently launched a new exchange-traded fund [ETF] that allows investors to make big bets against the equity markets in China. The UltraShort/Xinhua China 25 Proshare (FXP) made its debut last week and is already seeing a lot of action. ProShares has also listed a few other ETFs that will allow investors to make leveraged bets on declines in markets throughout the Asia/Pacific region.

An exchange-traded fund is a pooled investment that investors can buy and sell like shares of stock. The most popular today is the ProShares QQQ Index Trust (QQQQ), which holds the top 100 non-financial stocks that traded on the NASDAQ Stock Market. Over recent years, the numbers of ETFs has grown exponentially and the universe includes a number of international funds. These funds allow investors to profit from trends in overseas markets.

For example, an investor might buy into the iShares FTSE/Xinhua China 25 Index Fund (FXI) if they want to participate in the rally in China’s equity markets. The FXI holds the same twenty-five stocks as the FTSE/Xinhua China 25 Index, which includes both H and Red Chip shares. Red chip shares are stocks of Hong Kong incorporated companies that trade on the Hong Kong Stock Exchange. Meanwhile, H shares are companies incorporated in the Peoples Republic of China [PRC] and selected by the Chinese government for listing on the Hong Kong Stock Exchange. In recent years, the fund has performed well. It is up nearly 200% since the fall of 2005.

After a surge in equity prices and talk of asset bubbles, some market watchers now believe that it is time to bet against China. One way, is to sell short shares of ETFs like the iShares FTSE/Xinhua China 25 Index Fund. Or, the strategist might buy puts or create bearish spreads on the fund in anticipation of a move lower.

Now, with last week’s launch of the UltraShort/Xinhua China 25 Proshare fund, investors have another option. Trading under the symbol FXP, the fund was created to move opposite to the FTSE/Xinhua China 25 Index, but two times as fast. Given the volatility in China and other emerging markets, making leveraged bets against them is obviously not for the faint of heart. For example, on Tuesday, when the FXI was surging $14.40 to $183.90 a share, the FXP was down $16.72 to $76.28. The 17% one-day loss is probably more volatility than many investors can stomach.

The volatile UltraShort/Xinhua China 25 ProShare fund is one of several ways to make leveraged bets against the Asia/Pacific markets. The UltraShort MSCI Emerging Markets ProShare (EEV) moves opposite to the iShares Emerging Markets Fund (EEM), which is an ETF that tracks the performance of the the MSCI Emerging Markets Index. Meanwhile, the UltraShort MSCI Japan ProShare (EWV) moves opposite to the MSCI Japan Index and can be used to make leveraged bets against shares listed on the Japanese equity markets.

So far, no options have been listed on the international UltraShort funds. That might change over time, however, and when it does, the big daily swings and volatility in those funds could make them interesting vehicles for trading spreads and straddles based on the outlook for China and the emerging markets.

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