FXP: Make Money if Chinese Stocks Crush

Chinese stocks have been hit pretty hard lately, no matter where the stocks are listed, US, Hong Kong, or mainland China. To get a sense of how bad things have been recently, take a look at these numbers:

  • Hang Seng Index (^HSI) is currently at 27,588, down more than 4,000 points from the peak of 31,638 reached on October 30th. That’s a loss of more than 12%.
  • Shanghai Composite Index (^SSEC) dropped 973 points from the record high of 6,092 on October 16th, enough for a decline of 16% in less than a month.
  • iShares FTSE/Xinhua China 25 Index (FXI) plunged nearly 17% since it reached $218.52 on October 31st.

Of course, the crisis in the US financial markets has ignited the sell-off around the world, the stock markets in Hong Kong and China were hit particularly hard, compared to the 7+% loss of the Dow and the S&P from their respective peaks on October 9th. One of the reasons contributed to the steep decline of Chinese stocks is that China decided to postpone indefinitely the plan to let its citizens to invest directly in stocks listed on Hong Kong Stock Exchange, fearing that the flood of money could further inflate the Hang Seng index, which has been pushed higher and higher since such plan was announced in the summer.

If you are an investor with a significant portion in Chinese stocks and want to protect your investments, or if you are one of those who believe that the Chinese stock market is a bubble waiting to burst (I am neither), you may profit from it if that theory turns out to be true.

Last week, ProShares launched a ETF that allows investors to make money if Chinese stocks tumble as many have anticipated. The new ETF, ProShares UltraShort FTSE/Xinhua China 25 (FXP), seeks daily investment results that correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 Index. According to the fund’s prospectus (PDF):

If UltraShort FTSE/Xinhua China 25 ProShares is successful in meeting its objective, its value (before fees and expenses) should gain approximately twice as much, on a percentage basis, as any decrease in the FTSE/Xinhua China 25 Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the index rises on a given day.

The fund started trading on November 8th and has an expense ratio of 0.90%.

Sounds like a neat idea to make some quick money? Maybe in the short term.

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3 Responses to “FXP: Make Money if Chinese Stocks Crush”

  1. MoneyNing |  Nov 12, 2007 at 6:49 pm

    When I first saw the ad in WSJ, I thought that the ETF is super risky given the performance on China (even though I was so nervous about the China market becoming a bubble).

    But man someone could have made so much money if they bought FXP since inception!!!

  2. Jeremy |  Nov 12, 2007 at 8:52 pm

    Just use put options, on FXI. Less gimmicky.

    I made about $5000 on the FXI drop doing VERY conservative trading of puts. Sadly, a good bit of it was simply covering the loss on my FXI long position (which I didn’t sell and haven’t sold; I’m still way in the green and trying to be optimistic).