Featured # Mutual Funds & ETFs | 3 years ago

Knowing How to Use ETFs to Call Out Where Chinese Shares Will Open Can Be Harder Than it Looks

Looks can be deceiving when it comes to using U.S.-listed China exchange-traded funds to identify where Chinese stocks will open.

While ETFs have become a go-to way of sorting out what investors think of international markets that are closed during U.S. hours, there is more than meets the eye in the situation of mainland China when it comes to using the funds to determine where stocks will open.

Not only is China’s domestic market almost entirely owned by local shareholders which can make it less predictable than markets with a greater proportion of foreign ownership yet it is also very much subject to actions carried out by the Chinese government.

Throw in whatever happens in U.S. markets while China is closed, and you get a wild back-and-forth ripple effect in which closing down in the U.S. can point to an ‘up’ day in China and vice-versa.

Below is a table of the past three days of daily returns of the largest, most-traded U.S. ETF that tracks mainland China stocks: the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF.

The daily return of ASHR mirrors the price of market sentiment of China during U.S. hours, subtracting any moves that had to be worked off or added from the previous night.

Bill Gross, the lead manager of the $1.3 billion Janus Global Unconstrained Bond Fund, demonstrated this on Thursday when he made a prediction during an interview on Bloomberg TV that China would open down 6 percent on Friday.

ASHR immediately declined 7 percent to pay off the credit from China’s horrible day.

So where did China open? Up 2 percent, not even close to the 6 percent drop Gross had predicted.

ASHR was up.54 percent on the day, yet this was bad news for China’s market on Monday because it was less than the 2 percent China was up overnight, minus the 1 percent carried over from the day before.

ASHR fell below its 1 percent floor because the Standard & Poor’s 500-stock index was down on Friday, leading U.S. investors to believe that some of this would spill into China.

This is an example of how ASHR is hit by ripples and waves from both U.S. and China markets.

China did have a bad day on Monday-but it was much worse than the.50 percent ASHR predicted, falling 4.7 percent.

China’s market went on to open 1 percent higher on Tuesday morning.
While ASHR can be a good measure of what U.S. investors think of China, nothing is what it appears at first glance, as happens so often in the People’s Republic market.

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