As The US And China Duke It Out Over Trade, Traders Flock To Chinese Leveraged ETFs

2018 has not been a kind year for international equity investors.

The whiplash has been especially bad for the Chinese markets, which were among the strongest in 2017. The FTSE China 50 Index, for example, rose 22 percent last year, but is down about 12 percent year-to-date. This is true for both US-listed stocks, and Chinese-listed ones.

In Hong Kong, internet conglomerate Tencent Holdings TCEHY is down 24 percent for the year, and financial stocks like Industrial and Commercial Bank of China IDCBY and China Construction Bank CICHY are down 15 and 12 percent respectively.

In the US, Baidu Inc BIDU is down 10 percent for the year, while JD.com Inc JD and Weibo Corp WB are both down more than 35 percent. Even cream-of-the-crop Alibaba Group Holding Ltd BABA is trading at 15 percent deficit. And all of this while the S&P 500 has risen nearly 8 percent to new all-time highs.

While investors have struggled, the constant back-and-forth between the US and China on trade policies and tariffs has created an opportunity for traders, at least according to Direxion, the largest provider of leveraged ETFs.

They told Benzinga that traffic to their China pages— which include the Direxion Daily CSI 300 China A Share Bear 1X Shares CHAD, Direxion Daily CSI 300 China A Share Bull 2X Shares CHAU, Direxion Daily FTSE China Bull 3X Shares YINN, Direxion Daily FTSE China Bear 3X YANG, and Daily CSI China Internet Index Bull 2X Shares CWEB Shares—were all dramatically higher this summer.

Looking at fund flows, which can provide clues about how traders are using ETFs, every one of those ETFs except CWEB has seen large inflows since the beginning of June, according to ETF.com. While it’s hard to discern too much from that because these funds are commonly used by institutional traders as part of larger strategies, it does tell us that money has been pouring into the funds (though we don’t know whether it’s on the long or short side).

Here is the flow data for this group since June 1:

• Direxion Daily FTSE China Bull 3X Shares                          $67.10 million
• Direxion Daily CSI 300 China A Share Bear 1X Shares       $30.51 million
• Direxion Daily CSI 300 China A Share Bull 2X Shares        $21.06 million
• Direxion Daily CSI China Internet Index Bull 2X Shares    -$31.29 million
• Direxion Daily FTSE China Bear 3X Shares                       -$7.31 million

If this trend is to be believed, it appears likely these vehicles will continue to be popular at least through September or until the US and China come to a definitive agreement on trade deals.