ETF Trends
ETF Trends

As highlighted by the Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT) and the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS), this year’s two best non-leveraged exchange traded funds, both of which have more than doubled year-to-date, Chinese small-caps are hot in 2015.

Don’t forget the Guggenheim China Small Cap Index ETF (NYSEArca: HAO). Up 29.3%, HAO also ranks as one of this year’s best-performing non-leveraged ETFs. However, HAO has recently fallen hard times, tumbling 7.6% since hitting an all-time high on May 27.

It looks like options traders are betting those declines are set to reverse. To this point in Thursday’s session, traders have gobbled up more than 4,520 calls in HAO across the September $31, $32 and $33 strikes, all of which are in the money with the ETF currently residing around $33.60, according to Livevol data.

That is a staggering jump in HAO’s average daily call volume of 400 contracts. Today’s call/put ratio in the ETF is 61.1 to 1. Entering the day, the ratio of HAO calls to puts was under 2 to 1.

HAO has a lengthy track record of outperforming China large-cap ETFs. Over the past three years, HAO has outperformed the iShares China Large-Cap ETF (NYSEArca: FXI) by 1,520 basis points while being nearly 200 basis points less volatile. [Proper Application of China ETFs]

However, the $293.4 million HAO has been overshadowed by its A-shares counterparts this year as traders have bid up mainland Chinese equities in anticipation of A-shares being elevated to global benchmarks by major index providers. Earlier this week, MSCI confirmed it will add A-shares to its global indexes when China addresses market accessibility issues. On May 26, MSCI rival FTSE Russell said it will include A-shares in its global benchmarks. [Investors Pile Into A-Shares ETFs]

The opportunity with HAO could come on valuation as H-shares, Chinese stocks trading in Hong Kong, including some held by HAO, are significantly less expensive than their mainland equivalents. The Hang Seng China AH Premium Index, which tracks the relative prices of 59 stocks that have both A- and H-share classes available shows A-shares trading at 40% premium to H-shares, the largest premium in six years.

Another catalyst could lift HAO as well. When Shenzhen is added to the Shanghai-Hong Kong Stock Connect program, Hong Kong-listed small-caps will become eligible for mainland listings. That could stoke a flurry of buying of HAO components.

HAO Options Breakdown

Chart Courtesy: Livevol