Record Surge of China ETF Speaks to Risk and Opportunity of Chinese Market

By Keith Fitz-Gerald
And William Patalon III
Money Morning Editors

It's not particularly unusual to see a $10 stock move up 9.43% in a day. But it's extraordinary to see a $200 stock make that kind of move.

It's even more amazing to see something like this happen on a day when the Dow Jones Industrial Average swung by a staggering 237 points from high to low, while the broader Standard & Poor's 500 Index moved 25 handles from peak to valley and back again.

And yet that's just what the benchmark exchange-traded fund (ETF) for China did yesterday (Wednesday).

The iShares FTSE/Xinhua China 25 Index ETF (FXI) soared $18.76 a share, or 9.43%, to close at $217.80 yesterday. The ETF - viewed as a benchmark for China's stock market - also hit a 52-week high of $218.48.

No matter how you slice it, this was an extraordinary move and is one that dramatically highlights China's potential as well as the considerations facing U.S. investors who refuse to "go global."

We say this because:

  • You can't afford to avoid China: The FXI ETF is up 95% year to date.
  • And you can't afford to rely solely on the U.S. market: The closely watched S&P 500 Index is only up 9% year to date.

Just think about that: The U.S. market has underperformed this broad-based China ETF by 86%.

Since the end of September alone, FXI has soared from $180 per share to yesterday's close of $217.80 - a gain of 21% in less than three weeks.

Is it too late to "go global" - or more specifically - to play China?

Not at all.

But be very careful about chasing FXI at these levels. It's risen a very long way in a very short time and may be over-extended. Big surges like the one we experienced yesterday - which cap an already-protracted run - is a potential indication that a profit-taking sell-off is only days away.

For investors who don't yet have an investment in China, the FXI ETF remains a great play to make. But risk-management is key. So if you want to make this investment, but you're concerned about a possible correction, as we are, buy in with new money, but in equal increments over the next few months to keep your risk down.

And if you already have FXI in your portfolio, consider using trailing stops to protect your profits. [To read a detailed interview with Asia expert Keith Fitz-Gerald on China and its potential - including some stocks to consider - please click here].

In the meantime, the surge that sent the FXI ETF to a new high yesterday carried over and sent Asian markets higher today (Thursday). Asian markets continued to soar today, with Hong Kong's benchmark Hang Seng index even crossing the threshold of 30,000 for the first time ever in intraday trading.

China-related stocks such as Bank of Communications and Aluminum Corp. of China, or CHALCO (ACH), helped fuel the surge. Japanese shares also advanced in early trading today. However, stocks on mainland China dropped sharply in trading this morning as investors took profits after a string of record finishes in recent weeks. In early trading on mainland China, the Shanghai Composite Index fell 2.6% to 5,882.55.

"The market is really volatile," Conita Hung, head of equity markets at Delta Asia Financial Group in Hong Kong, told "The Hang Seng index is up mainly because investors expect [Hong Kong-listed] shares to close the [valuations] gap with [Shanghai-listed shares], but some are cautious because of fears China may announce further tightening measures."

In an investment-research report released today, Morgan Stanley (MS) Research analysts downgraded their rating on Hong Kong markets to "cautious sell," in view of stock valuations that have "become untenable," the analysts reported.

"We see a 30% probability of a correction to 24,000 [representing a potential decline of 20%] in the coming three months, which would take us down to fair value ... from there we could resume the bullish trend," the Morgan Stanley research report stated.

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About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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