It’s Cheap to Hedge the Biggest China ETF
The iShares China Large-Cap ETF (FXI) , the largest exchange traded fund tracking Chinese stocks, has surged 15.3% over the past 90 days, forcing the cost of downside protection on the fund to record lows.
“Puts hedging against a 10 percent decline on FXI cost 0.94 point more than calls betting on a 10 percent increase on June 3, according to three-month implied volatility data compiled by Bloomberg. That’s the lowest level on record for the measure known as skew,” reports Belinda Cao for Bloomberg.
Bets that policymakers in Beijing will take the necessary steps to prop up the world’s second-largest economy have contributed to the rally in FXI.
Last month, China cut reserve requirements for banks and announced the State Council plans to reduce social financing costs and maintain reasonable growth in credit and social financing in light of “relatively large” downward economic pressure. [Easing Measures Lift China ETFs]
China’s economy is expected to expand 7.3% this year, its weakest pace since 1990. Premier Li Keqiang has stated that the government is shooting for a 7.5% growth target this year.
FXI’s implied volatility, “used to track options prices, for the bearish contracts was 20.3 on June 13, compared with 18.7 for the bullish calls,” according to Bloomberg.
Although the ETF is rising an its volatility is declining, investors have largely steered clear of FXI, indicating a level of distrust in the current rally in Chinese stocks. [China ETFs Soar, but Investors Don't Seem to Care]
Since the start of the second quarter, FXI has shed $494 million in assets compared to almost $454 million brought in by the WisdomTree India Earnings Fund (EPI) over the same time. The iShares MSCI Brazil Capped ETF (EWZ) and the Market Vectors Russia ETF (RSX) have combined for second-quarter inflows of over $321 million.
iShares China Large-Cap ETF
ETF Trends editorial team contributed to this post.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
