It’s Getting Pricy to Bet Against China ETFs

The iShares FTSE China 25 Index Fund’s (NYSEArca: FXI) recent woes are mounting up. Slack data out of the world’s second-largest economy and investors running for the exits when it comes to anything with the emerging markets label, bonds, currencies and equities, are among the issues that have weighed on the largest China ETF by assets over the past few months.

Not surprisingly, FXI is not taking all this bad news well. Last Friday, the ETF lost 2.75% on volume that was nearly 86% higher than its daily average. For the week, the fund lost almost 4% and is now down 9.5% in the past month. Year-to-date, FXI is down almost 19%, a loss that is roughly 600 basis points worse than what the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) has endured. [June Could be Another Bad Month for China ETF]

There are signs traders expect things to get worse before they improve for FXI. The price of three-month puts on FXI jumped to the highest levels since September last week while the 4.3-point premium of puts over calls was the widest since April 17, reports Belinda Cao for Bloomberg.

That news is significant because while there is no shortage of ETFs offering exposure to China, none of the China-specific funds have the robust level of options activity that FXI does. That includes funds with a penchant for outperforming FXI over long-term time frames, such as the iShares MSCI China Index Fund (NYSEArca: MCHI). [ETFs for China’s Domestic Rebound]

The open interest in FXI’s August $33, $33.50 and $34 puts is almost 50,000 contracts compared to just 2,900 contracts for the same strikes on the call side, according to Options Monster data. In September, those same put strikes currently have open interest of about 9,600 contracts combined, but open interest for those same calls is less than 300 contracts.
FXI is often criticized for its larges weight to financials (55.3%), but it is some of the ETF’s non-bank holdings that have been real problems as of late. In the past month, China Mobile (NYSE: CHL) is down 10.3%. Offshore oil exploration firm Cnooc (NYSE: CEO) is lower by 8.6% while PetroChina (NYSE: PTR), China’s largest oil company, has plunged 16%.