FXI iShares China Large Cap

The first four months of the year turned out to be pretty solid for the U.S. equity market. In the period, both the S&P 500 and the Dow flourished only to record new multi-year and then all-time highs. Equities and ETFs saw a huge amount of asset inflow signifying that investors were turning to riskier assets for higher returns (3 ETF Strategies for the Second Quarter).

The strong momentum in Wall Street since the start of the year indicates that the bull may be back in the market. A number of market sectors have performed remarkably well in the year-to-date period, thanks to the market optimism.

However, it has been noticed historically that there are some assets or sectors which tend to lose steam from May through October. Considering the current positive environment in the U.S. and various economic data that further strengthens the optimistic view on the economy, this may not turn out to be true this season. However, as a caveat, the last two years saw these assets/sectors largely underperforming the market.

With that being said, let us consider three ETFs that have underperformed in the May-June period over the last two years. If we follow the historical trend, these ETFs are best avoided even if a broader bull continues:

iShares Silver Trust (SLV)

SLV is one of the most popular ways to speculate on the price of silver. SLV after recording new highs in April 2011, headed for a fall in May.

In fact, SLV which was once trading at an all-time high plunged significantly by the end of Jun 2011. May 2012 also repeated the trend with the ETF recording a loss of 10% (Time to Buy Silver ETFs?).

A look at the current trend in SLV very well signifies that the ETF may repeat the same pattern in May 2013 as well. The ETF is already off 13% this month and with prices of silver still expected to go lower in the short term, no better performance can be expected out of this ETF in May.

Launched in April 2006, this is the largest silver ETF with an AUM of $7.9 billion. The fund seeks to match the spot price of silver, net of fees and expenses and own silver bars to back the shares.

It tracks almost 100% the physical price of silver bullion measured in U.S. dollars, and kept in London under the custody of JPMorgan Chase Bank N.A. Each share represents about an ounce of silver at current prices.

The ETF is the most liquid and widely traded physically backed silver offering in the precious metal space. The fund charges a fee of 50 basis points annually.

iShares FTSE China 25 Index Fund (FXI)

Another ETF for which summers turn out to be cold is FXI. FXI is the most popular way to tap the Chinese equity market. In the past two years, the fund’s performance has been disappointing for investors (Is It Time to Buy China ETFs?).

Starting with a flat performance in May 2011, the fund finally plunged to record a fall of 10% by mid July, while in May 2012, the fund registered a loss of 12.8%.

May 2013 also does not seem to reverse the trend for this ETF. The ETF has already recorded a loss of 3.7% this month and with China GDP coming in lower than expected, the ETF is not expected to put up a good show in May 2013 either.

FXI is both rich in asset base and volume. The fund manages an asset base of $6.3 billion and trades at a volume level of more than 12 million shares a day.

The ETF’s exposure to Chinese stocks is limited to a small basket of 26 stocks. It does not therefore have a broad exposure to the country’s securities. Also, the fund is biased towards the top ten holdings as more than 60% of the asset base goes towards them.

Among individual holdings, China Construction Bank, China Mobile and Industrial and Commercial Bank of China take the top three positions. For investment in the fund, FXI charges a fee of 72 basis points from investors.

Bottom Line

The summer months have not been great for these ETFs historically, but that does not indicate that history will repeat itself this time around. However, looking at the current scenario of the commodity and Chinese markets, it is hard to argue with this trend, suggesting that these two ETFs may struggle in May.

One way to benefit from these falling prices is to go long in equivalent inverse ETFs. ProShares UltraShort Silver (ZSL) and ProShares UltraShort FTSE China 25 (FXP) are the two ETFs which tend to exhibit good performance when their unlevered forms are underperforming.

ZSL has already returned 37.5% in this month while FXP has gained 6.8%. However, it is important to remember that these only look to replicate short performances for a single session, although they have been solid longer-term performers lately as both of their respective markets have slumped (4 Ways to Short Gold with ETFs).

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ISHARS-FT CH25 (FXI): ETF Research Reports
 
PRO-ULS FT CH25 (FXP): ETF Research Reports
 
ISHARS-SLVR TR (SLV): ETF Research Reports
 
PRO-ULS SILVER (ZSL): ETF Research Reports
 
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