The iShares China Large-Cap ETF (NYSEArca: FXI) is down 9.9%, a decline that is noticeably worse than the 8.6% for the iShares MSCI Emerging Markets ETF (NYSEArca: EEM).
FXI’s rapid decline has made it increasingly to bet against the ETF via the options market. “Puts hedging against a 10 percent decline on FXI cost 5.8 points more than calls betting on a 10 percent increase, according to three-month implied volatility data compiled by Bloomberg,” reports Belinda Cao for Bloomberg.
FXI is the largest China ETF by assets and the most heavily traded with average daily volume for the trailing three months of almost 23.1 million shares. Perceived liquidity advantages often steer investors and traders to FXI, which has historically proven to be a laggard compared to other China ETFs. [FXI’s September Surge Makes Puts Cheap]
For example, FXI has lagged the db X-trackers Harvest CSI 300 China A-Shares Fund (NYSEArca: ASHR), iShares MSCI China ETF (NYSEArca: MCHI) and the SPDR S&P China ETF (NYSEArca: GXC) to start 2014.
“Implied volatility, used to track options prices, for contracts with an exercise price 10 percent below the Chinese ETF was 28.8 on Jan. 31, compared with 23.03 for calls 10 percent above,” Bloomberg reported.
FXI’s woes this year have been compounded amid fears possible shocks in the Chinese banking system. Recently, there have been ample amounts of controversy as concerns have escalated about China’s shadow banking system and a possible debt crisis in the world’s second-largest economy. [China ETF Exposure Without the Banks]
The $5.4 billion FXI allocates 55% of its weight to the financial services sector, nearly quadruple the weight allocated to telecom, the second-largest sector represented in the ETF, and six of the ETF’s top-10 holdings are financials.
iShares China Large-Cap ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.