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
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:
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.
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:
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.
This article was written by
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.