What is FXP? The Make-up of This Inverse ETF

With the past few weeks bringing trouble to most of the inverse ETFs, many have wondered what these ETFs are tracking. Today, I am going to break down FXP, which has taken a severe beating the past month, due to praise China has received with help from government stimulus money as well as rate cuts.

FXP is the 2x leveraged ETF that inversely tracks the FXI China 25 Index/Xinhua. FXI is the NYSE traded index that is identical to FTSE which is traded on the Honk Kong Stock Exchange (HTSE). Weights are capped at 10%, so that there is not an over-concentration of one particular security. The index consists of two main security types:

H Shares - By definition H shares are securities of companies incorporated in Mainland China and nominated by the Chinese government for listing and trading on the Hong Kong Stock Exchange. They are quoted and traded in HKD. The only Chinese investors permitted to trade H shares are those who are approved by the Government, however there are no such restrictions on international investors.

Red Chips are securities of companies incorporated outside the People's Republic of China that trade on the Hong Kong Stock Exchange and are quoted in HKD. The constituents are substantially owned, directly or indirectly, by Chinese state-owned enterprises. The only Chinese investors permitted to trade H shares are those who are approved by the Government, however, there are no such restrictions on international investors.

All the securities that make up the FXI Index can be identified as either a Red Chip or H Share securities. The following are all of the securities that make up the index, along with their weight percentage and security type:

1. China Mobile (Red Chip) 10%
2. Industrial and Commercial Bank of China (H) 9%
3. Petrochina (H) 8%
4. China Life Insurance (H) 7%
5. CNOOC (Red Chip) 6%
6. Bank of China (H) 4%
7. Bank of Communications (H) 4%
8. BOC Hong Kong (Holdings)(Red Chip) 4%
9. China Communications Construction (H) 4%
10. China Construction Bank (H) 4%
11. China Merchants Bank (H) 4%
12. China Petroleum & Chemical (H) 4%
13. China Shenhua Energy (H) 4%
14. China Telecom (H) 4%
15. China Unicom (Red Chip) 4%
16. Ping An of China (H) 4%
17. China Coal Energy (H) 3.69%
18. China COSCO Holding (H) 2.51%
19. China Merchant Holdings (Red Chip) 2.28%
20. China Netcom (Red Chip) 1.95%
21. Aluminium Corp of China (H) 1.61%
22. China Citic Bank (H) 1.12%
23. Huaneng Power International (H) 1.02%
24. Datang International Power Generation (H) .96%
25. Air China (H) .85%

Usually you can tell what the general direction of FXP is heading by following China Mobile (CHL), it having the most weight at 10%. This should now give you some direction of why FXP moves the way it does. Even on days when the DJI is down, it does not necessarily mean that FXP will be up. FXP follows the above securities, and lately they have been performing at their own speed due to the recent government intervention in China. In my opinion, this should not last long. Here's a good article underlying reasons, that I heavily agree with, that should bring some problems for China in the near future at seekingalpha.com.

Hopefully, this clarifies things for those that have been confused about FXP. There are many things written about these inverse ETF funds, both positive and negative. My feelings on the issue is that in this volatile market, they act as a great way to make quick profits without having to buy on margin. Sure, there is an expense in these funds, but for me, they have not stood in the way of some big profits.

I will be hosting a Stock Market Carnival on this site this Thursday, December 18, 2008. A blog carnival consists of other stock related sites with a brief explanation of what their site is about. I will try and keep it to worth while sites that will help you in your research. If you want to submit your own site, click here (you will need to register). I hope everyone has had a good weekend. Asia is up right now, which could correlate to yet another bad day for FXP tomorrow. We'll see what the market brings to the US tomorrow. Happy Trading.

4 comments:

  1. Anonymous Says:

    Hey,
    I'm a commodity trader between US and China. You're right. Both import and export are down significantly after the sharp decline of stocks and investor confidence. One thing I notice in recent months is that Chinese stock market (Shanghai) seems to be like an inverse ETF of other Asian markets(Hong Kong, Japan, Korea, Taiwan). When other asian markets are up 5%, shanghai will be up 0.5% or even down. and when others are down china will be up. What are your thoughts? Also china's market has fallen more than 65% from it's high, a lot more than other countries. I know the fundamentals are still bad, but how much more do you think china can fall? another 10%-20%?
    -W

  2. Anonymous Says:

    Would you be willing to blog on the tax implications of the proshare ETFs?

    Keep up the good work.

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