China exchange traded funds have been one of the hottest corners of the ETF universe this year. That much is confirmed by the fact that five of this year’s top 11 non-leveraged ETFs are China funds.
That quintet includes a pair of funds that hold Chinese A-shares, the stocks that trade on mainland exchanges in Shanghai and Shenzhen. One of those two, the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT), is one of a scant number of ETFs that have hit all-time highs to this point in Friday’s trading session.
“Foreign investors have piled in through A-share ETFs, since they offer a way to access this category without having to perform due diligence on individual companies and/or avoiding the operational issues of investing directly in the market through the Stock Connect,” according to a note published Friday by Direxion.
A-shares ETFs have indeed rewarded investors this year. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), the largest U.S-listed A-shares ETF, has surged nearly 26% year-to-date. If the CSI 300 Index, ASHR’s underlying index, can build on those gains, risk-tolerant investors could find the Direxion 2x Daily CSI 300 China A Share ETF (NYSEArca: CHAU), the first leveraged A-shares ETF to list in the U.S., to be a compelling opportunity. [First Leveraged A-Shares ETF Debuts]
CHAU, which Direxion introduced last month, attempts to deliver twice the daily performance of the CSI 300 Index.
“Chinese A-shares could rise further in 2015, as the market tends to move on the momentum and sentiment of retail investors, who are just re-entering the stock market. In addition, there’s the potential for A-shares to be included in global indexes in the near future, which could increase investor demand,” adds Direxion.
Though CHAU is still in its infancy, it is doing a fine job of delivering twice ASHR’s daily performance. For example, ASHR is down 4.2% this week while CHAU is off 8.9%.
There are valuation considerations to be made with China ETFs, notably that stocks trading on the mainland are pricier than their Hong Kong-listed counterparts. [H-Shares ETFs are big Draws]
“While the Hang Seng China Enterprises Index soared 17 percent in April, the most since October 2011, A shares in China are still trading at a 31 percent premium to stocks in Hong Kong,” according to Bloomberg.
“The premium of A-shares relative to Hong Kong based Chinese stocks could narrow if arbitragers use the new Stock Connect to enter the market and sell short the A-shares and reduce the premiums we mentioned above. And what if the government decides against further monetary easing?,” notes Direxion.
The narrowing of the A-shares/H-shares premium could increase the potency of the Direxion Daily China 3x Bull (NYSEArca: YINN), the triple-leveraged answer to the iShares China Large-Cap ETF (NYSEArca: FXI). YINN attempts to deliver triple the daily performance of the FTSE China 50 Index, FXI’s underlying benchmark. [Increasing Activity for Leveraged China ETFs]
Though it has been the second-most volatile triple-leveraged bull fund in Direxion’s lineup over the past 30 days, YINN has seen some creation activity over that period, according to Direxion data.
Direxion Daily FTSE China Bull 3X Shares
