Bear­ish China ETF fades in a year

As growth out­look bright­ens, as­sets of Direx­ion shrink to $90m from $403m in Au­gust 2015


A year ago, an ex­change­traded fund called Direx­ion was de­signed to profit from de­clines in Chi­nese stocks. It proved to be a stand­out when it was cre­ated. Now, how­ever, Direx­ion is lan­guish­ing. For, China’s growth out­look has im­proved.

To­tal as­sets in the ETF surged 101 times to $403 mil­lion from June to Au­gust 2015 as traders piled in to take ad­van­tage of a mar­ket sell­off.

Now, Direx­ion’s as­sets have shrunk to less than $90 mil­lion as the lever­aged fund’s shares trade near a record low.

The Direx­ion Daily CSI 300 China A Share Bear 1X Shares fund, the fastest-grow­ing new ETF when it was started last year, has dropped 24 per­cent from this year’s high in Fe­bru­ary.

Bet­ter-than-ex­pected eco­nomic data and govern­ment ef­forts to en­hance mar­ket trans­parency have helped drive a re­bound in main­land­traded stocks from the low­est lev­els in two years.

“When it comes to a lever­aged fund, one day you can be the best-per­form­ing prod­uct when the mar­ket is co­op­er­at­ing, and the next day you are crashed,” Mo­hit Ba­jaj, a di­rec­tor of ETF trad­ing so­lu­tions at Wal­lachBeth Cap­i­tal in New York, said. “We may see the fund rally again once the sen­ti­ment on China sours, but it’s easy to make a mis­take and lose a lot of money.”

Ba­jaj should know. He has been cov­er­ing ex­change-traded funds for more than 10 years.

The quick suc­cess of the Direx­ion ETF, the first de­signed to use lever­age to am­plify re­turns from fall­ing Chi­nese main­land shares, was partly be­cause of the right tim­ing. It started just prior to a mar­ket crash spurred by a sur­prise yuan de­pre­ci­a­tion. For some bears, it was eas­ier to buy the fund than use the two other main op­tions avail­able at the time -- the fu­tures mar­ket or short-sell­ing the Deutsche X-track­ers Har­vest CSI 300 China A-Shares ETF.

A year ago, when the China mar­ket rout was at its worst, the Direx­ion fund’s as­sets swelled at the fastest pace among the al­most 200 US-traded ETFs that started in the prior eight months, ac­cord­ing to data com­piled by Bloomberg.

Af­ter about $5 tril­lion of eq­uity value was wiped out in the rout last year, China has moved to im­prove ac­cess to mar­kets and sta­bi­lize a slow­down in eco­nomic growth. The na­tion’s eco­nomic ex­pan­sion held at 6.7 per­cent in the sec­ond quar­ter from a year ear­lier, beat­ing the 6.6 per­cent growth fore­cast in a Bloomberg sur­vey.

“If we see a pull­back in China, I would ex­pect that the as­sets in the bear fund would creep back up again,” Sylvia Jablon­ski, man­ag­ing di­rec­tor at Direx­ion In­vest­ments, said. “We never rec­om­mend hold­ing our ETFs for a long pe­riod of time, at least not with­out ac­tively man­ag­ing and re­view­ing your po­si­tion on a daily ba­sis.”

Lever­aged ETFs use swaps or de­riv­a­tives to try to am­plify daily in­dex re­turns, de­liv­er­ing the mul­ti­ple on a one-day re­turn. This ul­ti­mately can pro­duce higher-than-ex­pected gains if the in­dex moves in one di­rec­tion over the long term. Mar­ket re­ver­sals will lead to worse- than- an­tic­i­pated re­turns.

Lau­rence Fink, who over­sees the world’s big­gest suite of ETFs as chair­man of Black­Rock Inc, has sharply crit­i­cized the lever­aged struc­ture, say­ing such funds could “blow up the mar­ket”. Reg­u­la­tors are pay­ing close at­ten­tion, par­tic­u­larly af­ter find­ing ETFs were partly re­spon­si­ble for a bout of mar­ket may­hem last year.

For the brave of heart, lever­aged funds could bring some hefty re­turns. Four of the top five US ETF per­form­ers this year are lever­aged funds. The best-per­form­ing fund this year, Direx­ion Daily Ju­nior Gold Min­ers In­dex Bull 3x Shares, has ral­lied 920 per­cent this year through Aug 18.

Some ex­change-traded fund an­a­lysts re­main cau­tious.

“The level of risk that the lever­aged funds have is too much for some of the tra­di­tional ETF in­vestors to put up with,” Todd Rosen­bluth, a New York-based di­rec­tor of ETF re­search at S&P Global Mar­ket In­tel­li­gence, said. “Lever­aged funds are for some highly so­phis­ti­cated traders, but even so the risk is too high you can lose all you got.”

drop in key US-traded ETF from this year’s high in Fe­bru­ary Num­ber of US-traded ex­change­traded funds that Direx­ion out­per­formed last year.


Traders work on the floor of the New York Stock Ex­change on Aug 23. New York-based com­pany Direx­ion lnvest­ments last year launched an ex­change-traded fund or ETF that prof­ited by short­selling Chi­nese stocks.

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