The recent excessive credit and slowdown in the growth of China's gross domestic product (GDP) presents rare short opportunities for investors. To go short on China, investors have several easy options, which entail taking either long or short positions on exchange-traded funds (ETFs). A direct way of profiting from a downturn in the Chinese equities market is to short broad market China ETFs, such as iShares FTSE China 25 Index (NYSEArca: FXI)
A most effective way to short China markets is to take short positions in ETFs that invest in Chinese stocks. Investors should be cautious about their short positions since they entail greater risks of limited upside and unlimited downside potential.
iShares FTSE China 25 Index ETF is one of the most prominent funds that invests in Chinese large-market-cap companies. About 49% of the fund's holdings are concentrated in the financial sector, while companies in technology, energy and communication services have about 36% allocation. Financial companies tend to be the most exposed to any equity and credit bubble, and if the bust comes, banks and other financial institutionsare the most affected. The fund has a 0.74% expense ratio.
Guggenheim China Small Cap ETF is another fund investors can short to profit from market downturn in China. Because the fund invests in small-cap companies, it tends to have higher volatility but greater downside potential, making it an ideal candidate to short China. The fund primarily invests in companies with large and medium capitalization concentrated in industrial, technology, consumer cyclical and real estate industries. The fund has an expense ratio of 0.76%.
Instead of shorting broad market China ETFs, investors can take short positions in sector-specific funds that invest in Chinese firms. If investors view certain sectors, such as financial or real estate, as being prone to greater downside, several sector-specific ETFs exist, such as the Global X China Financials and Guggenheim China Real Estate ETFs.
The Global X China Financials ETF invests exclusively in Chinese financial companies by allocating 79% of its holdings to financial companies and 21% to real estate companies. The companies in the fund's portfolio tend to have very large market capitalization and broadly reflect the insurance and banking businesses in China. The expense ratio of the fund is 0.65%.
The Guggenheim China Real Estate ETF invests primarily in Chinese real estate companies with 93% of its portfolio invested in real estate and 5% invested in financial companies. The fund invests in very large real estate Chinese companies, such as China Overseas Land and Investment, CK Hutchinson Holdings and Hongkong Land Holdings. The fund has an expense ratio of 0.71%.
Instead of taking short positions in long China ETFs, investors can buy directly inverse funds that short Chinese equities. Inverse China ETFs can be unleveraged, such as ProShares Short FTSE China 25, or leveraged ETFs, such as Direxion Daily China Bear 3x Shares.
ProShares Short FTSE China 50 is an inverse fund that can be used as an effective tool to profit from market downturn in China. The fund seeks performance that corresponds to the inverse (-1x) of the daily performance of the FTSE China 50 Index. The ETF takes shorts positions with a high concentration on the financial sector with 48% allocation, communication sector with 21% and energy sector with 14%. The fund has an expense ratio of 0.95%.
Direxion Daily China Bear 3x Shares is a leveraged ETF that seeks investment results 300% of the inverse performance of the FTSE China 50 Index. The fund has an expense ratio of 0.95%.
Read more: Looking to Go Short on China? Here's How (FXI, HAO) | Investopedia http://www.investopedia.com/articles/active-trading/081415/looking-go-short-china-heres-how.asp#ixzz4wxglsspE
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