Think Chinese Stocks Have More Downside? 2 Inverse ETFs Offer A Bearish Edge

 | Jul 12, 2021 05:19

Equities in China, the world's second-largest economy behind the US, have been making headlines. Regulators in the Asian nation have been targeting tech names that are, or plan to be, listed overseas. Most recently, following tighter regulation by the Cyberspace Administration of China (CAC), shares of the ride-hailing company Didi Global (NYSE:DIDI) have come under pressure.

On June 30, Didi had its initial public offering (IPO) in the US. The stock opened at $16.65 and reached a high of $18.01 the same day. However, by July 8, the shares were down to $11 and are now hovering at $12.

Raising capital overseas has been gaining momentum among many Chinese businesses. But Beijing's restrictive stance has led to investor unease and declines in many China-headquartered stocks on Wall Street.

Several widely-followed exchange-traded funds (ETFs) that focus on China have also been adversely affected. They include:

  • Invesco China Technology ETF (NYSE:CQQQ): down 4.3% year-to-date (YTD) and down about 5.8% so far in July;
  • Global X MSCI China Consumer Disc ETF (NYSE:CHIQ): down 6.5% YTD and down 5.7% in July (covered here);
  • KraneShares CSI China Internet ETF (NYSE:KWEB): down 18.4% YTD and down 10.3% in July (covered here).

Meanwhile, the SZSE Composite index returned about 4.6% YTD, and the Shanghai Composite is up 2.1 % YTD. Despite their moderately positive performance in 2021, both indices have been choppy in the past few weeks.

As the risk premium for investing in Chinese businesses, especially in the tech sector, increases, many investors wonder how they can protect their current holdings of Chinese stocks. Given the policy uncertainty, others might want to benefit from further declines in those shares. One possibility could be to put together an options-based strategy to protect their existing stock of ETF holdings and hedge against a fall in price in the near future.

Other readers, especially short-term traders, could consider buying an inverse ETF, a topic we have covered in detail before. Such a move could be regarded as a tactical trading alternative to selling an existing stock or fund position. Today, we'll briefly discuss such two inverse ETFs.

1. Direxion Daily CSI 300 China A Share Bear 1X Shares/h2
  • Current Price: $16.88
  • 52-Week Range: $15.05 - $22.77
  • Expense Ratio: 0.85% per year

The Direxion Daily CSI 300 China A Share Bear 1X Shares (NYSE:CHAD) seeks to achieve daily investment results of 100% of the inverse (or opposite) of the performance of the CSI 300 index. Put another way, CHAD is set up to move in the opposite direction of this benchmark on a daily basis. The fund started trading in June 2015, and has about $127 million under management.