Why Investors Should Avoid this China Bear ETF (YANG)

Bad news out of China is driving stocks lower, leading investors to seek ways to short the country any way they can. While many options are out there, the Direxion Daily FTSE China Bear 3X ETF (YANG) is one to avoid.

The CSI 300 index has fallen into negative territory since the start of February, but YANG has lost over 5 percent in the same period despite being an inverse fund — attempting to inverse the Chinese market by shorting the largest Chinese equities.

Several recent data points have helped weaken Chinese stocks but have not helped bring YANG higher. Earlier in February, China announced its forex reserves fell below $3 trillion. Prior to that, the People's Bank of China announced that it would raise its interest rate target by 10 basis points in an attempt to combat China's growing corporate debt burden. (See also: China's Debt Grew at a Terrifying Rate in the Last 12 Months.)

The fund's use of leverage -- borrowing to sell short three times the fund's total capital -- is the main cause of its poor performance, because leverage costs drag down returns. Additionally, the fund is not designed for long term holdings, because it attempts to approximate three times the return of the fund's benchmark on any given day. As the company states on its website, "These leveraged ETFs seeks a return that is 300% or -300% of the return of their benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day." To achieve this result, YANG will aggressively resell and repurchase its assets, causing a further drag on returns.

"The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage, Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios," Direxion warns.