Can the China ETF Rally Last? | ETF Trends

China country-specific ETFs are caught up in a strong rally, but some warn of the dangers of a sentiment fueled push that ignores fundamentals.

The iShares MSCI China ETF (NASDAQ: MCHI), the largest China ETF by assets, jumped 9.7% over the past week while the Xtrackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), the largest China A-shares related ETF, advanced 14.0%.

However, a number of investors are warning of a repeat of the 2015 fiasco after stock prices surged without the aid of improving economic numbers, the Financial Times reported.

“Equity prices are rising far above levels implied by their historical relationship with earnings,” Thomas Gatley, an analyst with Gavekal Research, a research company, said. “The prospects for year-on-year earnings growth cannot justify this exuberance.”

China’s CSI 300 index of Shanghai- and Shenzhen-listed shares surged 5.7% on Monday to a five-year high. However, Gatley warned that the rally contrasted with a fall of 51% in non-financial corporate earnings over the first quarter of the year.

While industrial profits are gradually returning with a recovering economy, the gains will remain modest for the year and not to the spectacular tune investors are pricing in.

“Even if industrial profits grow 10 per cent year on year for June-December, profits for the year will remain below 2019 levels,” Gatley added.

However, for the short-term, the official support from Beijing and loosening liquidity measures can combine to fuel the market exuberance based on little more than a fear of missing out.

“While Monday’s surge in share prices was dramatic, I am sure the generous liquidity situation and prospects for more easing measures are helping in providing a favourable setting for the stock market,” Louis Kuijs, head of Asia economics at Oxford Economics, a research firm, told the Financial Times.

Alternatively, traders who believe the worst is not yet over may consider ETFs strategies to hedge against a potential drawdown.

For example, the ProShares Short FTSEChina 50 (NYSEArca: YXI) takes the simple inverse or -100% daily performance of the FTSE China 50 Index. The ProShares UltraShort FTSE China 50 (NYSEArca: FXP) attempts to deliver double the daily inverse or -200% returns of the same index. More aggressive traders may look to something like the Direxion Daily FTSE China Bear 3X Shares (NYSEArca: YANG), which takes three times the inverse or -300% daily performance of the FTSE China 50 Index.

The Direxion Daily CSI 300 China A Share Bear 1x Shares (NYSEArca: CHAD) was the first inverse A-shares ETF to trade in the U.S. The ETF is designed to deliver the daily inverse performance of the CSI 300 Index.

For more information on the Chinese markets, visit our China category.