Amid a U.S. delegation sent to Shanghai this week to resume stalled trade negotiations, President Donald Trump fired off a tweet accusing China of not following through on promises to buy more U.S. agricultural products. In a rapid escalation that caught many market watchers by surprise, the president announced Thursday that the United States will start imposing 10% tariffs on $300 billion worth of additional Chinese goods, including electronics, apparel, footwear, and toys.
News of a fresh round of duties leveled at the world's second-largest economy comes just two days after economic data released from China's National Bureau of Statistics (NBS) showed that manufacturing activity remained sluggish in July. While the country's manufacturing purchasing managers index (PMI) inched up to 49.7 last month from 49.4 in June, it remains below the 50 threshold that separates expansion from contraction, reflecting the challenges from ongoing trade tensions.
"Despite the uptick in July, economic conditions haven't improved since June," Larry Hu, an economist at Macquarie Group Limited, told The Wall Street Journal. "The Chinese economy is still in the middle of a downturn cycle. The worst hasn't come yet," Hu added.
Those who want to position for more volatility in Chinese stocks as the trade war between Washington and Beijing rages on should consider trading these three China inverse exchange-traded funds (ETFs) that go up as stock markets go down. Below, we examine the metrics of each fund and consider several trading plays to profit from further bearish price action.
ProShares UltraShort FTSE China 50 (FXP)
Formed in 2007 and charging a 0.95% management fee, the ProShares UltraShort FTSE China 50 (FXP) seeks to return two times the inverse daily performance of the FTSE China 50 Index. The ETF's benchmark comprises 50 large-capitalization stocks listed on the Hong Kong Stock Exchange. Significant exposure to financials (45.70%) and communication services (18.90%) makes the fund suitable for those who want to bet against sectors dominated by state-owned enterprises. Technology conglomerate Tencent Holdings Limited (TCEHY) commands the top allocation in the underlying index at 9.18%. Daily dollar volume liquidity of over $5 million combined with a narrow 0.03% average spread keep trading costs manageable. As of Aug. 2, 2019, FXP controls assets under management (AUM) of $33.22 million, offers a 0.81% dividend yield, and has slumped 16.94% year to date (YTD).
The ETF's share price tracked lower between January and April before rallying 20% in May. Price fell toward the 2019 YTD low in June as hopes of a trade deal breakthrough gained momentum after President Trump met with his Chinese counterpart Xi Jinping in a sideline meeting at the Group of 20 (G-20) summit in Japan. News of fresh tariffs imposed on China saw bulls return to the fund Thursday, pushing its price above a downtrend line that extends back to October 2018. Traders who play the breakout should aim to book profits near key resistance at $78 and protect downside with a stop positioned below the 50-day simple moving average (SMA).
Direxion Daily FTSE China Bear 3X Shares (YANG)
With net assets of nearly $80 million, the Direxion Daily FTSE China Bear 3X Shares (YANG) aims to provide three times the inverse daily return of the FTSE China 50 Index. The fund's additional leverage makes it a suitable instrument for traders who want an aggressive short-term bet against Chinese equities. With a daily turnover of roughly 355,000 shares and 0.03% spread, YANG offers ample liquidity to fill orders and minimize slippage. Traders should be aware that the ETF rebalances daily, which makes returns longer than one day subject to the effects of compounding. The fund's 1.08% expense ratio sits competitively priced for a geared product. YANG issues a 1.43% dividend yield and is down nearly 25% on the year as of Aug. 2, 2019.
YANG shares pulled back sharply in June but managed to hold above the April swing low. The most recent advance started in early July before a period of tight consolidation. Price regained momentum toward the end of last month and has continued its upward thrust into August, rallying above both a nine-month trendline and the 200-day SMA on heavy volume in Thursday's trading session. Traders may decide to scale out at $70 and $77.50 – both areas of overhead resistance. Consider setting a stop-loss order beneath yesterday's low at $50.28 to protect against a sudden price reversal.
Direxion Daily CSI 300 China A Share Bear 1X Shares (CHAD)
The Direxion Daily CSI 300 China A Share Bear 1X Shares (CHAD) attempts to return the inverse daily performance of the CSI 300 Index. This ETF provides U.S. investors with exposure to mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) – referred to as China A-shares. Key stocks in the tracked index include Ping An Insurance (Group) Company of China, Ltd. (601318.SS), Kweichow Moutai Co., Ltd. (600519.SS), and China Merchants Bank Co., Ltd. (CIHHF). CHAD charges a 0.85% management fee, has roughly $180 million in assets, and carries a YTD return of -23.97% as of Aug. 2, 2019.
Like the first two China bear funds discussed, CHAD shares forged a YTD bottom in April. Although price still trades below the May swing high, a 3.60% surge yesterday above the 50-day SMA and a closely watched downtrend line may trigger a bull stampede into this bear ETF as breakout traders enter the fray. The fund may also see buying pressure from traders rushing to cover their short positions. Those who decide to enter should look for a move to the $35 level, where price may encounter resistance from the lower trendline of a previous trading range. Manage risk by cutting losses on a retracement below the downtrend line and moving stops to the breakeven point if the price climbs above the 200-day SMA.