[This one may become very popular in the US]--A Chinese ETF Anti-Bubble
11/8/07
chinese.wsj.com
If you think the Chinese stock market is overvalued, ProFunds Group is with you.
Today, the Bethesda, Md., fund manager will introduce an 'ultrashort' China exchange-traded fund, an investment designed to rise in value when Chinese stocks fall, making it easier for investors to place bearish bets.
The appearance of the fund, called ProShares UltraShort FTSE/Xinhua China 25 ETF, means fund marketers think U.S. investors might be ready to turn against what has been a red-hot investment this year.
As if to underline the point, ProFunds, which specializes in funds that offer magnified and inverse returns relative to well-known stock benchmarks, doesn't plan a bullish China ETF -- just one that goes 'short,' betting against Chinese stocks.
ProFunds has also followed that strategy with some broader international offerings, and will add a bearish Japan fund, too. Chief Executive Michael Sapir says he has high hopes the China fund will catch on as a tool for 'bubble popping,' a reference to the recent run-up in Chinese stocks, which he compares to the extraordinary run-up in U.S. stocks in 1999.
The iShares FTSE/Xinhua China 25 Index Fund -- which follows the same 25 Hong Kong-traded stocks that the ProFunds ETF will bet against -- is up 76% so far this year, according to Morningstar Inc. The fund's annual returns have averaged 57% over the past three years.
Mr. Sapir sees signs U.S. investors may be getting wary. Despite the impressive returns, investors have yanked about $162 million from three China ETFs tracked by AMG Data Services so far this year through the end of October.
That goes against the grain. Investors have poured $32.8 billion into international stock ETFs as a group in 2007. The funds now hold about $176 billion, according to AMG.
Not everyone thinks betting against China is an easy call.
'There may be a bubble, but it's not like the 1990s, where these companies have no earnings,' says Zachary Karabell, co-manager of Alger China-U.S. Growth Fund.
While stock prices may have temporarily outstripped profits of Chinese companies, earnings are still increasing at a hefty rate, reflecting growth in the Chinese economy, he says.
Investors that try to predict the short-term direction of Chinese stock prices could get burned if prices -- as they did in February -- fall then quickly snap back. The new ProFunds ETF, which won't just bet against the Chinese stock market, but also magnify those returns, could pose an extra risk.
The aim of the fund will be to rise 2% on a day when the index of Chinese stocks it follows falls 1%, meaning the returns will reflect both the reverse of the index's returns and the effect of financial leverage, as if the investor had borrowed money to double down.
Exchange-traded funds resemble index-oriented mutual funds and trade on an exchange like a stock. Because U.S. ETFs trade when stock markets in China and other parts of Asia are closed, ETF's intraday prices usually reflect U.S. traders' views of how those stocks will perform when markets reopen.
Ian Salisbury |
