An escalating crackdown by the Chinese government leaves just one main way for investors to profit from Chinese stocks and ETFs. And that’s betting against them.
Only three exchange traded funds in the universe of more than 50 targeting China are up more than 10% in July so far through July 28, says an Investor’s Business Daily analysis of data from ETF.com and S&P Global Market Intelligence. And all three, Direxion Daily FTSE China Bear 3X (YANG), ProShares UltraShort FTSE China 50 (FXP) and ProShares Short FTSE China 50 (YXI), rise when Chinese stocks fall.
Other than shorts, “almost no sector of the Chinese market is currently green,” said Dave Nadig, director of research at ETFTrends.com. “You’re seeing just about everything get hit, down about 20% for the month at this point.”
Tough News For Chinese Stock ETFs
And there’s plenty of news from the Chinese government to rattle investors. Policies designed to curb Chinese companies’ freedom to go public are a negative. And limits on Chinese firms that provide education are cooling investment in the region. KraneShares CSI China Internet (KWEB), a more than $5 billion in assets ETF that owns growth companies, lost a quarter of its value in July.
This ETF is “hit hardest among the larger Chinese focused ETFs as it is heavily concentrated in the growth companies negatively impacted by the Chinese government’s heavy hand,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.
But the pain is widespread. TAL Education Group (TAL), a company that provides tutoring in China, saw its shares plunge more than 90% this year — and more than 70% just in July — as the Chinese government is looking to cut the pressures of academic cramming on children.
And that’s a direct hit on KraneShares CSI China Internet. More than 3% of the ETF’s portfolio is in TAL stock. That’s a higher concentration than in any other China-focused ETF.
But it’s not just smaller education firms in China suffering. Shares of the megacap Chinese online retailer Alibaba (BABA), dropped 16% this year.
Looking For Relative Safety In Chinese Stocks
Heavy-handed rules from China feed the bears on the region. The Direxion Daily FTSE China Bear 3X fund is up nearly 30% just in July so far. And it’s up more than 6% this year. The ETF not only bets Chinese stocks will fall. But it uses leverage to triple the effect each day.
Outside of bear ETFs, dodging the turbulence is tough. Global X MSCI Materials (CHIM) tries by holding only large companies that mine for commodities or provide construction materials. This ETF is up more than 5% in the month and upwards of 17% this year.
“Internet companies are particularly vulnerable to intervention (by the Chinese government) … they can, with the stroke of a pen, change the game for any company who’s primary business is ones and zeros,” Nadig said. “It’s a little bit harder for them to shut down manufacturing without causing a global freakout.”
Going Broad With China ETFs
Given the target on the backs of some industries in China, diversification makes sense, Rosenbluth says.
ETFs that own a wider array of Chinese stocks are holding up better, according to Rosenbluth. The $4.7 billion-in-assets iShares China Large-Cap (FXI) is down a more modest 11% this year. And the $6.9 billion iShares MSCI China (MCHI) is down just 11.1% this year. “They have more exposure to cyclical financial and industrials stocks,” Rosenbluth said.
China investors aren’t panicking, though. Hundreds of millions of dollar-equivalent money flowed into KraneShares CSI China Internet in late July, Nadig says. Many are looking for a quick profit on the dip.
But the actions by the Chinese government send shockwaves through portfolios. Even the massive $82 billion in asset Vanguard FTSE Emerging Markets ETF (VWO) puts more than 8% of its portfolio in Chinese companies. And that’s not to mention the more than 30% in Hong Kong firms.
“The action by China here is going to have long term consequences,” Nadig said. “I suspect we’ll see some de-China-ing of larger institutional portfolios over the next few quarters as they reassess the damage.”
Bears Rule Chinese Stocks
Mostly bearish and leveraged bets on China are up this month
|ETF||Symbol||YTD % ch.||1-month % ch.||Expense ratio|
|Direxion Daily FTSE China Bear 3X Shares||(YANG)||6.2%||29.1%||1.07%|
|ProShares UltraShort FTSE China 50||(FXP)||8.3%||20.2%||0.95%|
|ProShares Short FTSE China 50||(YXI)||5.7%||10.3%||0.95%|
|Global X MSCI China Materials||(CHIM)||17.3%||5.9%||0.66%|
|Direxion Daily CSI 300 China A Share Bear 1X Shares||(CHAD)||-1.8%||5.0%||0.85%|
|VanEck Vectors ChinaAMC China Bond||(CBON)||0.5%||0.2%||0.50%|
|KraneShares Bloomberg Barclays China Bond Inclusion Index||(KBND)||-0.3%||0.1%||0.50%|
Sources: IBD, S&P Global Market Intelligence, ETF.com
Follow Matt Krantz on Twitter @mattkrantz
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