YINN ETF: Bull In China Shop (NYSEARCA:YINN)

Background

China is open for business again after multiple lockdowns for the past three years. The Chinese stock market and the Hong Kong stock market have gone through rough drawdowns. Will the Chinese stocks be added back by investors after so many sold them over the past few years? There is hope as Chinese authorities have put economic revival as a top priority. So far, 2023 is off to a positive start. However, the market might want to be patient, if not cautious, as there could be setback to positive assumptions regarding Chines economy opening up. Sentiment towards Chinese stocks is still fairly negative, and this is the opportunity for patient investors.

Chinese stocks had a strong bounce since November 2022 as Covid related restrictions were relaxed. There was also support to real estate property developers where there is still a lot of debt default risk. Governments’ hostility towards the Chinese companies seems to have subsided as well. U.S. and China leadership have met and talked about working together at the G20 summit in Indonesia.

The Chinese economy is expected to grow about 5% in 2023 after slow economic growth, if not contraction, since the Covid outbreak in November 2019 when China went into lockdown. Chinese authorities are going to support their economy with supportive monetary policy as inflation remains subdued. Chinese stocks are at low valuations and trade at about 11 times forward price to earnings estimates.

Leveraged China Bull ETF

In this article, we will review Chinese ETF with focus on Direxion Daily FTSE China Bull ETF (NYSEARCA:YINN), which is a 3-times leveraged ETF. On a daily basis, the ETF seeks to do 300% of the performance of the FTSE China 50 index net of fees.

Risks

As with any leveraged product, YINN comes with a huge warning and is primarily for experienced traders and not a long-term investment option. There are significant risks of holding leveraged ETFs for more than a day or short-time periods. Direxion fund prospectus on holding UTSL as an investment for the long term – “No, this is not recommended. Leveraged ETFs seek daily investment results and should therefore be considered primarily for short-term trading purposes. It may, however, be appropriate to hold the funds for periods longer than a single day, depending on the performance path of the fund’s underlying benchmark index and the investor’s risk tolerance. Investors who choose to hold leveraged ETFs for periods longer than a single day should recognize that their holding period is not in line with the fund’s investment objective, and such investors should regularly monitor and adjust their position to maintain a level of exposure consistent with their investment objective.”

Annual Fees

Annual fees are higher than the average for ETF at 0.95%.

Holdings

The top holdings within YINN include familiar names like Alibaba (BABA), Tencent Holdings (OTCPK:TCEHY), and JD.com (JD) among others that are not listed on U.S. stock exchanges.

Charts

YINN went down almost 99% before bouncing up over 250%. The volatility in these triple leverage ETF can be crazy.

Alibaba had dropped over 80%, but the October 2022 lows are holding as it has bounced up. It is critical for BABA to breakout above the cloud.

Tencent also dropped a lot and has bounced. For a new uptrend, it needs a shallow pullback and then to break out completely above the cloud.

JD.com chart is similar to the ones above and, after this pullback, needs to break out above the cloud for a new uptrend to be confirmed.

Meituan chart is again similar to those from above, and a breakout above the cloud would be a positive sign for an uptrend.

The China Construction Bank has to climb higher to get and stay above the cloud for the new uptrend.

Baidu (BIDU) is on the cusp of breakout above the cloud and trending higher.

NetEase, Inc (NTES) is also closer to getting above the cloud into an uptrend.

Bank of China Ltd just cleared above the cloud and is likely to go higher.

Risks

FINRA on Leveraged ETFs:

Leveraged ETFs should be avoided unless a sophisticated trader uses them for day trading or a short time-frame with strict risk management. FINRA warning:

“Exchange-traded funds (‘ETFs’) that offer leverage or that are designed to perform inversely to the index or benchmark they track-or both-are growing in number and popularity. While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”

In addition, Chinese stocks, and thus the ETF’s based on stocks that do business and are based in China, face government regulatory changes risks, geo-political risks, and others.

Summary

I would use a regular ETF that is not leveraged if one were bullish on China. The Chinese stocks offer low price to earnings multiple and should be one to consider in 2023. YINN is a high risk option for day traders, and short-term option for momentum traders when used with proper risk management practice. The risk of holding a leveraged ETF like YINN is one I would avoid.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.