China Stock Frenzy Gets More Manic With First Leveraged ETF

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Want to double down on China’s world-beating stock rally? Now there’s an exchange-traded fund for that.

Direxion Investments is starting the first ETF that seeks to provide twice the daily return of mainland Chinese stocks using leverage, according to Andy O’Rourke, chief marketing officer for the New York-based fund provider.

The CSI 300 Index, which the ETF will track, has climbed to a seven-year high amid a frenzy of stock purchases by Chinese retail investors as the government eased monetary policy to counter a slowdown in the world’s second-largest economy. The ETF will be the first in the U.S. to use derivatives to amplify the return of mainland Chinese stocks, or so-called A shares, a market to which foreign investors until recently only had limited access.

“It was only a matter of time before a leveraged China A-share ETF came out trying to capitalize on the increased interest and flows into the area,” Eric Balchunas, a Bloomberg Intelligence analyst, wrote in an e-mail on Tuesday.

Investors have piled more than $2 billion into ETFs that invest in Chinese stocks over the past year, according to data compiled by Bloomberg. The iShares MSCI China fund, which invests in securities traded in Hong Kong, has lured $903 million, while the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF has attracted $537 million.

Expensive Fund

The Direxion Daily CSI 300 China A Share Bull 2X Shares will trade under the ticker CHAU. The fund has an expense ratio of 1.11 percent, making it the most expensive among China-focused ETFs, data compiled by Bloomberg show.

“The A-share market is an area of interest among many investors and we see an interest in A-Share leveraged ETFs,” Direxion’s O’Rourke said by phone Tuesday. “We’ll start with these products, but if we see that there is interest for some other exposure, we’ll fill in the gap.”

The Shanghai Composite Index has surged 94 percent in the past year, the best performance among the world’s major stock benchmarks tracked by Bloomberg, even as growth slows. China’s economy expanded 7 percent from a year earlier in the quarter ended March 31, the weakest pace 2009, according to data from the statistics bureau Wednesday.

Leveraged ETFs use swaps or derivatives to try to amplify daily index returns, in contrast to conventional funds designed to match the performance. They have come under scrutiny over several issues since 2009, when the U.S. Securities and Exchange Commission warned that they were typically “unsuitable” as long-term investments in volatile markets.

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