Wall Street Is Making Global Macro Bets With This BlackRock ETF

(Bloomberg) -- A $5.9 billion ETF is fast becoming the epicenter for Wall Street bets on everything from the global trade war, U.S. equity volatility and China’s sputtering growth engine.

Strategists are touting the allure of options on the iShares China Large-Cap exchange-traded fund, ticker FXI, as a cheap way to wager whether global markets can surmount the wall of worry that cut about $5 trillion from American equities during the December meltdown.

Wall Street Is Making Global Macro Bets With This BlackRock ETF

Traders are heeding the call. The number of open options contracts in the biggest U.S.-listed passive product tracking China recently soared to a three-year high and remains elevated, underscoring relentless demand to barricade portfolios from big-picture threats.

“Our known unknown, and, in our view, the only genuine threat of recession in 2019, is the U.S.-China trade dispute and China’s worsening slowdown,” Brad Tank, Neuberger Berman Group LLC’s chief investment officer for fixed income, wrote in a note.

Made In China

With the world’s second-largest economy expanding at its slowest pace since 2009 last quarter, buying puts on FXI is a straightforward way to hedge sluggish output in China and rifts in global commerce, according to Vinay Viswanathan, strategist at Macro Risk Advisors.

Fretting an imminent U.S. equity meltdown? The China ETF, which holds mainland companies listed in Hong Kong, may be a convenient tool, too.

Its implied volatility remains depressed relative to the benchmark SPDR S&P 500 ETF Trust, making puts on the former a cheap way to protect long positions in the latter, according to Viswanathan.

The trade could prove particularly effective right now as the correlation between the ETFs “has picked up significantly,” he wrote in a note.

Wall Street Is Making Global Macro Bets With This BlackRock ETF

Goldman Sachs Group Inc. strategist Rocky Fishman, for his part, proffered a bullish China trade in a note last week, suggesting investors could snap up cheap FXI calls in order to position for a positive resolution to the tariff dispute.

Adding to the chorus of Wall Street voices on ways to play the China ETF, Pravit Chintawongvanich at Wells Fargo & Co. has another read. Options in the passive product are a way to bet U.S. volatility will normalize versus the rest of the world for those banking that last year’s rout in American shares won’t be repeated anytime soon.

Buying the contracts on FXI while selling them in SPY is attractive “if you view the isolated volatility in U.S. equities as an anomaly,” the derivatives strategist wrote in a note.

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