It’s Getting Cheap to Bet Against Big China ETF

ETF Trends

The $5.18 billion iShares China Large-Cap ETF (FXI) is the largest, most heavily traded ETF tracking the world’s second-largest economy. It is also the China ETF with the most robust options activity. For example, open interest in the August FXI $33.50, $34 and $35 calls is over 52,000 contracts combined.

Open interest in the puts at the same strike prices is over 60,000 contracts, according to Options Monster data.  In what may be a sign that the darkest clouds have passed China ETFs, the cost of insuring FXI against declines is falling. FXI gained over 5.5% in July even after $37 billion was pulled from emerging markets equity and bond funds in June. [A Long, Rough Road for China ETFs]

FXI’s recent bullishness has forced the price of longer-dated puts on the ETF lower. Put options rise in value when the underlying security falls. The cost of six-month puts on the iShares China Large-Cap ETF had a 3.4-point spread with calls Aug. 2, the smallest gap since June 19, reports Belinda Cao for Bloomberg.

That is down 15% from the June peak when China ETFs, including FXI, were punished by a spike in the country’s Interbank lending rates, also known as SHIBOR. The SHIBOR debacle prompted elevated concerns about liquidity in the Chinese banking system, which predictably plagued large-cap China ETFs because those funds feature excessive allocations to the financial services sector. Financials currently account for 52.4 percent of FXI’s weight. [SHIBOR Woes Could Slam These ETFs]

FXI’s implied volatility, measure of options’ cost, sank to 25.2 last week from a nine-month high of 29.6 reached June 25, Bloomberg reported. FXI grabs the headlines because of its size and the fact that is home to many of the largest Chinese companies such as Chinese banks and energy giants like PetroChina (PTR). However, FXI and its holdings have been far from a leaders among Chinese equities and ETFs this year.

A leadership group of Chinese equities this year would be heavily populated by Internet names such as Ctrip.com (CTRP) and Renren (RENN). That has helped make ETFs such as the PowerShares Golden Dragon China Portfolio (PGJ) and the Guggenheim China Technology ETF (CQQQ) the real stalwarts among China ETFs. CQQQ is up 27% year-to-date while FXI is down 16.4%. [China ETF Trounces Rivals]

iShares China Large-Cap ETF

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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. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.

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