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NYSE-listed ETF to be Tied to Broad Chinese Index

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How's this for a macroeconomic play: short the declining superpower (U.S.A.) and go long on the up-and-comer (China). Until now it hasn't been possible. Coming soon, though, to a broker near you: an NYSE-listed ETF that tracks 25 of the most liquid stocks in China and is as shortable, marginable, and trigger-finger tradable as any share of QQQ.

FTSE/Xinhua Index Ltd (FXI) announced the launch this morning of a U.S.-dollar denominated version of the FTSE/Xinhua China 25 index that it anticipates will accommodate an exchange-traded fund (ETF). Jane Staunton, president of FTSE Americas, notes that a Hong Kong ETF is expected "sometime this fall."

"The index is designed for international investors to give them easy access to the Chinese market, and aims to capture the returns of the largest and most liquid Chinese stocks," Staunton told IndexFunds.com in an interview.

According to FXI, a joint venture company spawned by Chinese news agency Xinhua and London-based index provider FTSE (which is the result of a collaboration between the Financial Times newspaper and the London Stock Exchange), an ETF hitched to the index will launch on the New York Stock Exchange (NYSE) in early 2002. FXI and NYSE say they are actively searching for a sponsor for the fund.

The FTSE/Xinhua China 25 is a broad market index comprised of the largest and most liquid equities on the Chinese market. It was launched in Hong Kong in April. The chart below shows the short historical performance of the index.


Source
: FTSE

The U.S.-dollar version of the China 25 index will use American Depository Receipt (ADR) prices for the constituents that have ADRs trading in the U.S. ADRs are certificates traded in the U.S. that represent an interest in shares of a foreign company.

Jae Lie is chief operating officer of Xinhua Financial Network, the majority of which is owned by Xinhua, the official Chinese press agency. He notes that all of the stocks in the FTSE/Xinhua 25 are currently either "H shares," which are mainland companies whose stocks trade on the Hong Kong exchange, or appropriately named "red chips," which are Chinese-government controlled companies that trade on the Hong Kong market. Shanghai-traded stocks were excluded initially because of extreme volatility, but are eventually expected to be included in the index. According to Lie, approximately 60% of the stocks in the index are H shares.

Currently, 10 stocks in the China 25 that make up about 49% of the market cap of the index are listed as ADRs on NYSE (known in China as "N shares"). To learn more about the ground rules for the China 25, click here.

The announcement highlights the fact that NYSE is serious about catching up with the American Stock Exchange (AMEX) in efforts to set up a global trading trading platform for ETFs.

"The ETF to be launched on this index will be a landmark event for international investors accessing the Chinese market," said Mark Makepeace, FXI director and CEO of FTSE.

The chart below shows backtested historical performance of the FTSE
Xinhua/China 25 index on a graph compared to two other indexes (see legend below graph) up until April 19, 2001.


Graph courtesy of FTSE. Blue=FTSE Xinhua/China 25, Yellow=Hang Seng China Affiliated, Purple=MSCI China Free