Direxion Switches Index for Two Leveraged China ETFs - ETF News And Commentary

Direxion is strong name in the leveraged and inverse ETFs world. While many of its most popular bull-and bear leveraged funds target domestic indexes, the issuer has some offering in the foreign market as well. 

Direxion Daily China Bull 3X Shares

 (YINN) and 

Direxion Daily China Bear 3X Shares

 (YANG) are two such products.

These two offer targeted exposure to companies in China – but while YINN is a bull product, YANG gives short exposure in the China market. However, the duo stand at opposite poles in terms of popularity with much more interest being seen in YINN, the bull product.

YINN has generated over $90 million in AUM and solid levels of volume, while YANG has continued its struggle with about $9 million in assets. As a matter of fact, 

ProShares UltraShort FTSE China 25

 (FXP) stole the show in the short exposure segment of the China space, bagging more than $100 million in AUM so far (see the Intro to Leveraged Precious Metal ETF Trading).

This was partly because of a bull stance over China is recently in vogue which led YINN to reap a whopping 86% return in YTD frame (as of December 4, 2013) while more popular bear fund FXP lost 16% as yet. Also, a variation in index for both the bear products YANG and FXP is presumably contributing to their respective performances.

Index Change

Until recently, both YINN and YANG were tracking the BNY China Select ADR Index – a free float-adjusted capitalization-weighted index designed by the Bank of New York. But, Direxion recently announced that both funds would now be tracking the FTSE China 25 Index from December 12, 2013.

China has recently broken free from a long-stretched hard landing and roped in decent levels of investor interest. Given this, and a desire to focus more on some well-known Chinese companies, Direxion has undergone an index change though the ticker symbol remains unchanged. However, names will not be the same, as both will include ‘FTSE’ in their titles now (read: China A-Shares ETFs Explained).

How Does This Impact Investors?

The main change will come in the exposure profile. As of September 30, 2013, the BNY Mellon China Select ADR Index held about 43 companies in total. Exposure was less concentrated in large caps (about 50%), while growth stocks made up just 10% of the portfolio.

Under the FTSE China 25 Index, YINN and YANG will be almost solely exposed to large caps with a relatively higher tilt toward growth stocks (38%). This will provide investors with a decent growth opportunity and a cushion against volatility.

Through the new FTSE index the fund will get to access 25 highly liquid stocks. Higher trading volumes will likely lower the already higher bid-ask spread ratio for the two funds.

Sector-wise, the FTSE Index provides more than 50% exposure to financials while the former BNY index was the most vulnerable to oil and gas (23%) closely followed by technology (22%).

Specifically, the financial sector in the China is supposed to be a big winner as some brand new reforms in terms of interest rate liberalization and RMB convertibility are waiting round the corner (read: China ETFs Jump on Government Reform Afterglow). This sector allocation could, in fact, make a solid impact on the two funds.

Conclusion

There are some obvious differences between the old and new benchmarks. The larger number of financial securities and greater exposure to large caps seem to make the real distinction.

These products allow investors to decide on an economy which was so far subdued but is now off to a good start.  On a separate note, the FTSE China 25 Index is about to extend its coverage to a 50 stock index, effective 22 September 2014. This is to meet client demand and amid global recovery (see all the Asia Pacific ETFs here).

Thus, YINN and YANG will get to access a larger asset base next year on an expansion in the index which will provide more diversification. Investors should note that YINN and YANG rebalance daily, and therefore, the returns may differ from the underlying indexes over the long haul.

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PRO-ULS FT CH25 (FXP): ETF Research Reports

DIR-D CHIN 3XBR (YANG): ETF Research Reports

DIR-D CHIN 3XBL (YINN): ETF Research Reports

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