YINN: Revisiting A China Focused ETF In The Year Of The Bull

Summary

• 2021 was the Year of the Bull during Chinese New Year.
• Fitting for an ETF which prides itself on 3x leveraged exposure to a range of China focused equities.
• Some 6 months have passed since my original ETF analysis.
• Hence an opportunity to find out how this bull, in the later stages of its ETF life, is effectively faring.

Photo by Pazhyna/iStock via Getty Images

Overview

For those unfamiliar with the lesser known yet famed bull-in-a-China shop bet, Direxion Daily showcases (NYSEARCA:YINN). A 3x leveraged play on a discrete range of China focused equities, the product targets 50 large liquid firms with exposure to financials, technology, consumer services and energy.

An interesting combination, particularly given the increasingly visible rotation away from technology and renewed interest in financials, energy, and basic materials.

The fund is a long-term play on large-cap Chinese equities but, given its sizable leverage and recourse to exotic underlying securities to gain that extra lift, has its stomping ground firmly in the realms of tradable instruments rather than long-term holdings.

YINN, by the very nature of its underlying structure, allows for succinct in-and-out trades to manage China risk exposure. Yet, it is not an investable asset given its underlying, somewhat exotic structure.

Part of the family of leveraged ETFs, this fund is best used on a near-term basis. So, how has it fared since my previous post?

A new US administration is firmly in place, but little progress appears to have been made on appeasing Sino-American tensions, both political and economic. While China is gradually showing signs of an economic rebound, inflationary pressures and input costs are also starting to degrade competitiveness. So much so that recently, China started to crack down on more speculative activity in iron ore trading, plunging the commodity -14%.

Equally concerning is the state of China's global customer base - the US continues to get to grips with a post SARS-Cov2 economy while Europe finds itself amid a wave of economic shutdowns and re-openings which do little to stimulate sustainable economic growth. A global chip shortage is resoundingly impacting US industry yet boosted demand may play out positively for Chinese semi-conductor firms.

In all, it has really been a mixed bag for YINN since the start of the year, with the ETF finding new heights on the run up to February, only to be summonsed back to earth along with other tech heavy asset classes as US treasury yields gained momentum. With such wide-ranging price action, coupled with a product pushing towards the end of its product life cycle, fund outflows would seem highly probable.

My product outlook continues to be neutral - while leveraged, more exotic exchange traded funds do have a rightful place in the toolbox of any money manager, this bull appears to be on its last legs - at least in terms of product standing. Let us glance at any product developments which have occurred over the past 6 months.

Source: Market Chameleon

Recap

Direxion Daily FTSE China Bull 3x aka YINN is the fund manager's ageing large-tier leveraged China play. Now on the market for over a decade, the product allows traders to take on China focused risk exposure, with a skew towards financials, technology, consumer services and energy. Previously, the fund held assets of $267M.

A distinguishing product trait was the exclusion of mainland traded A shares as well as publicly listed companies in the US. Therefore, the underlying securities remained very much linked to the Hong Kong stock exchange. As a leveraged ETF, exposure to volatility plays a significant role.

As noted in my previous post, expense ratios to manage the fund were markedly on the high side, topping out at 1.37%. Among the highest in any ETFs I have previously covered, lofty management fees are tributary - at least to some extent - to the recourse of over-the-counter derivatives used in the product to provide the satisfactory amount of leverage.

With such magnification of returns comes additional perils - the main one being counter party risks for the OTC derivative trades.

A recap of intrinsic product characteristics include:

• A focus on financials, technology, consumer services and energy. Mainland listed Chinese equities or those listed in the US are excluded. Accordingly, the product is exposed to interest rate risk and systemic risk on the financial side, country risk on the technology side (particularly with the US sanctioning of certain tech players) and geopolitical risk related to energy.
• Leverage is re-balanced daily, impacting the differences in expected returns to the tracking index, particularly due to the product's compounding.
• Lofty expense ratios - possibly due to the administration of more exotic OTC derivative contracts - is a prominent part of the package.
• Previously, the fund had material exposure to the ETF China staple (FXI) holding approximately 2.92 million shares.

Year-to-date total returns (YINN) v (XPP)

Source: Trading View

It has been a roller coaster ride for the fund - with price action pushing to the upside mid-February, peaking at around +60%. Subsequently, momentum has been all down since then as evolving interest rate pressures started putting big tech under the pump in the US, only to be followed by the rest of the world. In all, since the start of the year, the product has delivered -14.51% - hardly anything to write home about.

Its closest competitor - (XPP) has had performed any better, tracking to some extent a similar price pattern to its peer. Faring marginally better, XPP has lost -7.80% since the start of the year. And contrasting this to FXI, it becomes increasingly clear that equity returns in China have not had the upside pop brought about by generous monetary and fiscal policy.

Structure

The underlying structure of YINN remains relatively intact - the fund targets the FTSE China 50 Index consisting of the 50 largest and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange. It translates this through the following holdings:

• FXI - iShares China Large Cap ETF (56.25%)
• DGCXX - Dreyfus Government Cash Management Funds Institutional (37.92%)
• US Dollar (5.83%)
• Goldman Sachs Trust Financial Square Treasury Instruments Fund Institutional (Presently 0.00%)

While weighting have changed somewhat - this concentrated bet comprised of (FXI), another institutional fund and the US dollar is quite like what we previously saw. Likewise, sector coverage profile - as underscored by FXI - remains the same.

An interesting point of note is the funds US $ holdings and the progressive weakness of the Greenback. Should we continue to see the situation worsen for the US currency - via current account deterioration, increasing ex-dollar trade and persistent low interest rate policy - the impact on this ETF may become progressively more meaningful.

Comparative Historical Analysis YINN - previous post v today

Source: Spreadsheet developed by author with data via ETF.com

Surprisingly, despite the lackluster performance - the fund has managed to attract additional dollars. Over the period, we have seen assets under management grow in the vicinity of 30%. Despite this, daily trading volumes have lowered with spreads flattening accordingly.

Difficult to know exactly why the fund has garnered such investor interest - perchance due to the excess liquidity hitting capital markets through broad monetary loosening.

Key Takeaways

• YINN is Direxion's specialized leveraged China bet which seeks to emulate price performance in the FTSE China 50 index, an index of 50 liquid large cap Chinese firms traded on the Hong Kong Stock Exchange.
• Interestingly, it is not (at least directly) exposed to mainland China equity plays nor to the more renowned Chinese names we see actively traded on US equity markets.
• It is a specialized fund - it embraces 3x leverage - sizable for any ETF product and in doing so touts additional risks such as the use of OTC derivatives and the ensuing counterparty risk. An additional remnant of the lofty leverage profile is the (perhaps) excessive management fees, reflective of more complex fund administration.
• While China has visibly bounced back from the SARS-Cov2 onslaught that hit the world late Q1, 2020 - reality is other challenges persist. Inflationary pressures are possibly raising their head as economies shocked back into life become heated up, and China's main export destinations - both Europe and the US - continue to find themselves in a spate of shutdowns. It is worth noting that the US vaccination effort appears to be reaping rewards while other structural economic challenges are seeing light of day.
• Price action for the ETF has been on a roller coaster ride - peaking around Mid-February only to come crashing back down to reality. To date, returns posted are around -15%.
• Luckily, an options market does exist for the product, signifying that traders can tailor risk exposures through the management of a portfolio of puts and call options.
• Despite its age - over a decade - the ETF has most recently attracted ~30% additional funds, possibly a sign of the current liquidity environment.
• More of a tradable near-term security than a long-term portfolio holding, this product continues to be comparably niche.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.