Shorts of China-heavy emerging-market ETF rise above $1 bln

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Investors have added almost $600 million to bets that an emerging-market index dominated by Chinese stocks will lose money.

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Short selling of the $71 billion Vanguard FTSE Emerging Markets ETF, which tracks an index heavy on Chinese A shares, surged in the past six weeks to $1.12 billion, or 1.6 percent of the fund, according to IHS Markit data. That leaves it the most shorted in 13 months, the data showed.

The surge in short interest on the Vanguard fund, the largest US index for emerging-market stocks, contrasts with other emerging-market ETFs that have a lower concentration in Chinese stocks, which have seen bearish wagers decrease.

The iShares MSCI Emerging Markets ETF has seen short-sold units drop to the lowest since September, according to Markit data. Short interest in the iShares Core MSCI EM ETF, which has the lowest allocations for Chinese stocks among its peers, is hovering near the lowest level since January.

Money managers who bet at the start of the year that China’s reopening will drive equity gains have been disappointed as stocks in the world’s second-biggest economy led a $500 billion selloff in emerging markets since January. The losses have come amid patchy economic data, rising geopolitical tensions and regulatory risks.

The Vanguard fund has tumbled 8 percent from a peak in January, underperforming its benchmark FTSE EM All Cap China A Inclusion Index on a one-month as well as three-month basis. As many as 2,495 of the gauge’s 4,552 stocks are Chinese.

Among the top 10 holdings of the Vanguard fund are Tencent Holdings Ltd., Alibaba Group Holding Ltd., Kweichow Moutai Co., Meituan and China Construction Bank Corp. The ETF offers a dividend yield of 2.6 percent compared with 3.2 percent on the MSCI Emerging Markets Index.

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