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China Tech Shunned, S&P 500 Shorted as ETF Investors Play Trade

China Tech Shunned, S&P 500 Shorted as ETF Investors Play Trade
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Monday, 20 May 2019 01:08 PM

Exchange-traded fund investors are shaking up their portfolios to prepare for any fallout from the trade skirmish between the U.S. and China.

There’s been a rush into domestically oriented small-cap shares, and out of funds that hold Chinese technology companies. Industrial stocks, often seen as a trade barometer, have also been under the knife. And even when it comes to the broader S&P 500 Index, short bets are rising toward the highest levels of the year.

“It’s been difficult for an investor to balance the near-term headwinds and some of the volatility that we’re going to continue to see probably through the end of June at least, with the possibility that we do get a resolution,” Liz Young, a senior investment strategist at BNY Mellon Investment Management, said on Bloomberg Television.

Here’s how investors and traders are taking to ETFs to play the trade war:

Betting Against the S&P 500

Traders are ratcheting up bets that the S&P 500 is set to fall. Short interest as a percentage of shares outstanding on the SPDR S&P 500 ETF Trust, better known by its ticker SPY, has risen to 6.4%, according to data from IHS Markit Ltd. That’s just about in-line with the highs seen earlier this year in March.

Small-Cap Focus

Meanwhile, investors poured nearly $800 million last week into the iShares Russell 2000 ETF, ticker IWM -- the most since December. The argument for small-caps goes that increased tariffs will hit exporters hardest, while smaller American companies that get a smaller portion of their sales from overseas will emerge relatively unscathed.

“Small caps are relatively better positioned than large caps in a trade war,” Trevor Gurwich, a portfolio manager at American Century, said on Bloomberg Radio. “One, they have more general domestic exposure. Two, there are a lot more to choose from -- we have over 6,000 names we can screen for, and we can always find a company out there that’s not necessarily exposed to a trade war.”

Mad Dash From China

Funds that focus on Chinese technology companies are bleeding assets. The $1.8 billion KraneShares CSI China Internet Fund, ticker KWEB, saw $95 million exit its coffers last week -- the largest outflow in nearly a year. Two behemoths alone, Tencent Holdings Ltd. and Alibaba Group Holding Ltd., make up roughly a fifth of the ETF.

Broader China-focused funds are also experiencing redemptions. The $4.3 billion iShares MSCI China ETF, ticker MCHI, lost $189 million last week, the most since 2013, while the $5.5 billion iShares China Large-Cap ETF, ticker FXI, is on pace for its worst month of the year.

Hedging Your Tech Bets

While markets have proved fairly resilient since U.S.-China trade talks broke down earlier this month -- the S&P 500 is only about 3% below an all-time high -- the tech-heavy Nasdaq 100 Index has had a rougher time, falling more than 4% over the past two weeks. Losses resumed Monday, with the gauge down 1.4% as of 10:52 a.m. in New York.

That’s left traders hedging their bets. Total open interest, or the amount of both bullish and bearish derivatives contracts that haven’t yet been settled, on the ETF that tracks the Nasdaq 100 (QQQ), rose as high as $8.4 million contracts last week, the highest level of the year.

Bailing on Industrials

Due to the sector’s outsize exposure to China, industrial stocks have taken a beating this month. The S&P 500 Industrials gauge is the third-worst performing this month, with only technology and materials companies faring worse, and ETF investors are taking note. The Industrial Select Sector SPDR Fund, ticker XLI, saw about $500 million in outflows last week, the most this year.

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Exchange-traded fund investors are shaking up their portfolios to prepare for any fallout from the trade skirmish between the U.S. and China.
etf, investors, trade, tech, china
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2019-08-20
Monday, 20 May 2019 01:08 PM
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