Alternatives: The Next Dimension in Asset Allocation

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For investors looking to achieve leveraged and inverse exposure to China’s stock market, there are a handful of options available. It’s important to note that these products will be capable of considerable volatility; Chinese equities are already subject to big price swings in relatively short periods of time, and the addition of explicit leverage creates products that aren’t for the faint of heart.

While China ETFs bring significant risks, they also carry the potential for tremendous returns; a well-timed trade in one of the leveraged funds highlighted below can bring investors meaningful returns in a matter of hours in the right environment. For risk-hungry investors, there are a number of potentially intriguing leveraged ETFs that may be useful trading vehicles.

Under the Hood

Up and Down Arrows

Each of the leveraged China ETFs features a daily reset mechanism, meaning that they seek to deliver returns over the course of a single trading session only. When held for longer or less than a single session, the effective leverage achieved can deviate from the target multiple indicated.

The leveraged and inverse China ETFs use derivatives to accomplish their stated objectives. While this structure doesn’t bring any meaningful additional risk, it’s worth noting in order to better understand how these securities function.

Leveraged and Inverse Options

TickerETFLeverageExpense Ratio
YINNDaily China Bull 3x Shares3x0.95%
YANGDaily China Bear 3x Shares-3x0.95%
CHAUDaily CSI 300 China A Share Bull 2x Shares2x0.95%
XPPUltra FTSE China 252x0.95%
FXPUltrashort FTSE China 25-2x0.95%
YXIShort FTSE China 25-1x0.95%

Direxion Daily China Bull 3x Shares (YINN B)
This ETF is the 3x counterpart to YANG, and as such is appropriate only for risk-tolerant investors who have the willingness and ability to monitor positions closely. Anyone using YINN should be prepared to experience some significant volatility; it is not uncommon for this ETF to swing by 5% or more in a single session.

Direxion Daily China Bear 3x Shares (YANG B-)
YANG is a -3x leveraged ETF, offering even more substantial leverage for risk-tolerant investors looking to bet on a short-term decline in Chinese stock markets. This ETF will often exhibit significant volatility and will also be impacted by the path of the underlying index if held for multiple trading sessions.

Daily CSI 300 China A Share Bull 2x Shares (CHAU B-)
CHAU is 2x leveraged to the CSI 300 Index, which consists of 300 A-Share stocks listed on the Shenzen or Shanghai Stock Exchange.

ProShares Ultra FTSE China 25 (XPP C)
The Ultra FTSE China 25 seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the FTSE/Xinhua China 25 Index.

ProShares UltraShort FTSE China 25 (FXP C+)
FXP seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the FTSE/Xinhua China 25 Index.

ProShares Short FTSE China 25 (YXI B-)
YXI might be a useful tool for investors looking to hedge existing exposure to Chinese stocks, though it should be noted that this ETF is designed to deliver -100% exposure over a single period only.

Disclosure: No positions at time of writing.

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