China Fund FXI Soars, But Few Riding Rally

April 09, 2015

 

Trading Activity Could Suggest Flows To Follow

From a trading perspective, activity in FXI suggests investors who have been somewhat absent from the rally might be waking up to the opportunity, says Paul Weisbruch, VP of ETF/options sales and trading for Street One Financial. Pointing out that trading volume in FXI has nearly tripled normal levels in recent days, he says that if that rally lasts, assets might start to flow in.

 

“One missing piece thus far for FXI has been inflows—in spite of the price action higher—but this picture may change quickly in the short term, especially if China equity strength does not fizzle and volatility remains relatively low in the space compared to other segments of emerging markets,” he added.

 

There's also a view that the recent widening of the spread between mainland Chinese equities, also known as A-shares, and Hong Kong-listed stocks could be fueling some of the upside in FXI, and the uptick in trading activity. Investors may be rotating from one type of exposure to the other.    

 

Consider that in the last 12 months, the Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-53), which invests exclusively in A-shares, rallied nearly 89 percent. That's almost twice as much as FXI gained in the same period, as the chart below shows.  

 

 

The Alibaba Angle

Other ETFs that offer access to one of the hottest Chinese stocks—Alibaba—are also starting to gather critical mass, even if they have yet to become “household names,” Street One’s Weisbruch notes.

 

FXI does not currently have exposure to Alibaba, but KraneShares CSI New China ETF (KFYP | D-25) and the KraneShares CSI China Internet ETF (KWEB | B-22) each allocate roughly 11 percent and 8 percent, respectively, to BABA. The Renaissance IPO ETF (IPO | A-50) has Alibaba at nearly 10 percent of the portfolio.

 

Trading is picking up pace in these funds as they perform well, even if asset flows remain nothing to write home about. But that could soon change as more ETF investors take notice of these funds, Weisbruch says.

 

Charts courtesy of StockCharts.com

 

 

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