Direxion has expanded its suite of ETFs designed for tactical trading with a new fund offering leveraged exposure to equities from emerging markets, excluding China.

China significantly underperformed the broader emerging markets universe in 2023.

The Direxion Daily MSCI Emerging Markets ex China Bull 2X Shares (XXCH US) has been listed on NYSE Arca with an expense ratio of 1.18%.

The fund delivers 200% of the daily return of the MSCI Emerging Markets ex-China Index which consists of large- and mid-cap companies within 23 developing economies, excluding China.

With 675 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

China is the largest country exposure within the flagship MSCI Emerging Markets Index with a weight of 24.9%. Its exclusion, therefore, significantly alters the country weightings in the ex-China index compared to the full EM universe. India is bumped up to the top spot with a weight of 23.9%, up from 18.0%, followed by Taiwan (22.1% vs. 16.6%), South Korea (16.3% vs. 12.2%), and Brazil (7.6% vs. 5.7%).

Information technology and financials lead the index’s sector exposures with weights of 27.7% and 25.0% respectively, followed by materials (8.9%), industrials (7.3%), and consumer discretionary (6.5%). The largest single constituents are Taiwan Semiconductor (9.8%), Samsung Electronics (5.1%), and Reliance Industries (2.1%).

Traditionally, China’s vast size, large population, continuous market reforms, and rapid economic growth have justified a heavier investment allocation towards the Asian superpower and the world’s second-largest economy.

Yet, a growing trend has emerged among investors seeking emerging market funds specifically excluding China. This shift is being driven by China’s mounting economic challenges, such as a persistent real estate downturn, consumer price deflation, declining exports, and increasing youth unemployment rates.

In 2023, the Chinese equity market, as measured by the MSCI China Index, declined by 11.0%, starkly underperforming when compared to the positive performance of other major emerging markets like India, Taiwan, and South Korea. This divergence in performance led the MSCI Emerging Markets ex-China Index to outperform significantly, delivering returns of 20.0%, notably higher than the 9.8% gain seen in the broader MSCI Emerging Markets Index.

Edward Egilinsky, Managing Director and Head of Sales and Alternatives at Direxion, commented: “Amidst the geopolitical swirl surrounding China, some traders are looking to separate the country’s stocks while maintaining broader exposure to the emerging market countries. XXCH allows precise short-term exposure, providing a tactical opportunity for traders to independently manage their exposure to China’s unique risks.”

Investors should note that inverse and leveraged ETFs are only suitable for sophisticated traders who understand the risks involved. Specifically, these products are not suitable as buy-and-hold investments as they tend to decay in value if held for an extended period, potentially leading to significant losses, especially in volatile but range-bound markets.