From the January 2008 issue of Research Magazine • Subscribe!

Shorting the China Boom

A meteoric run-up in Chinese stocks has some investors believing a strong reversal could be in the works. If that happens, now they'll get the opportunity to profit via a newly launched ETF.

In November, the ProFunds Group introduced the ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP), which is designed to increase in value if the Chinese market falls. For example, if the FTSE/Xinhua China 25 declined by 1 percent in a day, the fund should appreciate by 2 percent (before fees and expenses), and vice versa.

ProFunds simultaneously launched ETFs that provide short and leveraged short exposure (delivering twice the inverse daily performance of the underlying index) to the MSCI EAFE, MSCI Emerging Markets and MSCI Japan indices. According to the prospectus, the funds charge annual expense ratios of 0.95 percent.

"We anticipate strong investor interest in a simple and easy way to get short exposure to the Chinese equity market," says Michael Sapir, chairman/CEO of ProShares Advisors. "With the FTSE/Xinhua China 25 index appreciating by nearly 600 percent in the last five years, there is a great deal of talk of a potential for a 'China bubble.' The new ProShares UltraShort FTSE/Xinhua China 25 ETF can be used by investors to seek to hedge a portfolio with China exposure from losses or to pursue gains from a falling Chinese market."

Investors can use UltraShort ProShares to achieve short exposure without opening a margin account, and only risk the amount that they invest, whereas when they short stocks, stock baskets or ETFs, their losses are theoretically unlimited. Also, short and leveraged ETFs can be employed in vehicles that do not permit margin accounts -- IRAs, for instance -- and can easily be tracked throughout the day.

The $9 billion Pro-Shares family now includes 58 ETFs providing short and magnified exposure to a mix of domestic, international and industry sector market indexes.

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Ron DeLegge is the San Diego-based editor of www.etfguide.com.

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