2023-09-21 10:41:44 ET
Summary
- Leveraged ETFs are trading vehicles that amplify the returns of an underlying index, but they are risky and should be traded only at the right time.
- Direxion Daily CSI China Internet Bull 2X Shares ETF is a leveraged fund that aims to deliver twice the daily performance of the CSI Overseas China Internet Index.
- The CWEB ETF's performance has been worse compared to its non-leveraged counterpart, KraneShares CSI China Internet ETF, and the current volatility in the Chinese market makes it challenging to trade CWEB.
I've written about leveraged exchange-traded funds, or ETFs, lately in the context of my intermarket signals suggesting we are in a high-risk period right here and right now. Many will argue these are trading vehicles only (something I totally agree with). The question is when to trade them. I believe the odds of a large decline are rising meaningfully in all risk-on assets, as conditions continue to deteriorate beneath the surface. If I'm right about a credit event, everything takes a hit. The time to trade levered ETFs then, and perhaps in particular something that plays China, would be towards the end of the tail event.
With that said, the Direxion Daily CSI China Internet Bull 2X Shares ETF ( CWEB ) is a leveraged exchange-traded fund, or ETF, that seeks to deliver twice the daily performance of the CSI Overseas China Internet Index, before fees and expenses. It's important to note that this fund doesn't guarantee to meet its stated investment objective.
The CSI Overseas China Internet Index is provided by China Securities Index Co., Ltd. It measures the performance of publicly-traded China-based companies whose primary business or businesses revolve around the internet and internet-related sectors.
What is a Leveraged ETF?
A leveraged ETF is an investment vehicle that uses financial derivatives and debt to amplify the returns of an underlying index. In the case of CWEB, the aim is to double the return of its benchmark index on a single day. However, investors should not expect this fund to provide two times the return of the benchmark's cumulative return for periods longer than a day. The reason for this has to do with the daily reset and path of market movement. When whatever you're leveraging is trading in a broadly low volatility environment, there tends to be more daily streaks of successive positive days, which is additive from a compounding perspective. When in a high volatility environment where big ups are followed by big downs, leveraging daily into the volatile path results in far worse performance over time than most realize.
The CWEB Portfolio
CWEB's portfolio comprises large-cap, China-centric technology firms with a focus on the digital economy. As of 30th June 2023, the fund's top holdings included Tencent Holdings, Alibaba Group, and Meituan. Other prominent holdings included Baidu and NetEase, Inc. The index the ETF uses as a reference is actually relatively top-heavy, adding to broader risks.
When we look at sector composition, we see a surprising weighting in consumer retail industries from a classification standpoint. This, to me, also seems risky seeing how China's economy is struggling post lockdowns.
Peer Comparison
When compared to similar ETFs, CWEB's performance and risk profile stand out. For instance, KraneShares CSI China Internet ETF ( KWEB ), a non-leveraged counterpart to CWEB, has been stuck in a volatile sideways range all year. CWEB, on the other hand, has performed considerably worse. If you believe in China's Internet stocks, KWEB has been far better than CWEB to invest and trade in.
The Timing Challenge
Given the current volatility in the Chinese market, this might not be the best time to trade CWEB. The increased volatility will make it challenging for all daily reset leveraged funds to perform well in the near term. And while CWEB offers an opportunity to gain leveraged exposure to Chinese internet companies, it also comes with significant risks. The current political and regulatory climate in China adds to this. Therefore, while CWEB may be an enticing option for risk-tolerant investors looking to capitalize on the growth of China's internet sector, the path interaction of leverage and volatility, in this environment, is playing with fire.
For further details see:
CWEB: Stay Far Away (For Now)