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Direxion Files China A Share Bear ETF - ETF News And Commentary

After providing handsome returns last year, the Chinese equity markets are trading in the red in the year-to-date frame.

The world’s second largest economy expanded at 7.4% in 2014 – its slowest pace in 24 years – after expanding 7.7% in 2013. A slump in real estate, weak manufacturing activities and soaring debt are the major culprits for the slowdown.

The country’s central bank is taking every step possible to boost growth and has recently lowered the reserve requirement ratio by 50 bps to 19.5%, effective February 5, after cutting interest rates in November last year (read: Policy Easing Puts China ETFs in Focus).

Also, the recent crackdown on margin trading has sparked off concerns in the Chinese stock markets. Given the difficult times, issuers are filing for funds to provide inverse exposure to the performance of the Chinese equity markets.

Most recently, Direxion Investments has filed for a fund which proposes to provide inverse exposure to the performance of China – A shares. Though the expense ratio and the ticker have not been disclosed, below we have highlighted some of the details of the newly filed product.

DIREXION DAILY CSI 300 CHINA A SHARE BEAR 1X SHARES in Focus

As per the SEC filing, the proposed ETF seeks daily investment results of 100% the inverse performance of the CSI 300 Index. The index seeks to provide exposure to the largest and most liquid stocks in the Chinese A-share market. The fund is an inverse play on one of Deutsche’s popular products – db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) – which tracks the performance of the CSI 300 Index.

The fund presently holds a basket of 302 stocks with roughly one-fourth of the fund assets invested in the top 10 holdings. As far as sectoral allocation is concerned, the fund is heavily exposed to the financial sector with a little less than half of fund assets, followed by a little over 10% allocation to Industrials, Consumer Discretionary and Consumer Staples.

However, unlike ASHR, the proposed fund doesn’t satisfy the criteria to qualify as a Renminbi qualified foreign institutional investor (RQFII) or Qualified Foreign Institutional Investor program (QFII) itself, and as such expects to invest a majority of its assets in other investment companies (including ETFs) that seek to replicate the Index, swaps, futures contracts and other types of derivative instruments or financial instruments.

The fund uses the short proceeds to invest in money market funds or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit a high quality credit profile (read: China ETFs in Focus on Surprise Rate Cut).

How Does it Fit in a Portfolio?

The fund is a good choice for investors seeking to gain inverse exposure to the China A share market. After a strong rally last year, the Chinese equity market is trading in the red in the year-to-date frame.

The Chinese stocks recently suffered a setback after a crack down on margin trading. The regulator has prohibited three firms from lending money for stock purchases and opening new margin trading accounts for the next three months. This ban is expected to weigh on the Chinese stock markets at least for the near term and hamper capital inflows (read: China ETFs to Watch on Margin Trade Ban and GDP Data).

ETF Competition 

Presently, there are no listed inverse ETFs providing exposure to the stocks in the Chinese A-share market. However, there are a few ETFs that provide an inverse leveraged exposure to the overall Chinese equity space.

ProSharesUltraShort FTSE/Xinhua China 25 (FXP) with an asset base of $49.1 million is one such fund. The fund provides twice the inverse daily performance of the FTSE/Xinhua China 25 Index. The fund trades in low volumes of roughly 50,000 shares and charges 95 basis points as fees (see: all the Emerging Asia Pacific ETFs here).

Apart from this, ProShares Short FTSE/Xinhua China 25 (YXI) with an asset base of less than $5 million and ULTRA FTSE CHINA 50 (XPP) with an asset base of $62.5 million are some other ETFs in the inverse China equity space.

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DEUTS-XT HV CS3 (ASHR): ETF Research Reports
 
PRO-ULS FT CH25 (FXP): ETF Research Reports
 
PRO-SH FT CH25 (YXI): ETF Research Reports
 
PRO-ULT FT CH25 (XPP): ETF Research Reports
 
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