Market Overview

Short Europe ETF Highlights Issues With Leveraged Funds


We haven't been shy about illustrating the problems facing ETFs with significant Europe exposure in recent weeks. Simply put, no matter where you turn, you're going to find a see a red.

The Vanguard MSCI Europe ETF (NYSE: VGK) is down more than 15% year-to-date. Same goes for the iShares S&P Europe 350 Index Fund (NYSE: IEV). The news is even worse for the SPDR EURO STOXX 50 (NYSE: FEZ), which is down more than 20% year-to-date.

So all of this should be very good news for the ProShares UltraShort MSCI Europe (NYSE: EPV), right? After all, that ETF is the double-leveraged equivalent of the Vanguard MSCI Europe ETF.

We thought it would be worth looking into the matter, especially after reading a report earlier this week that touts the ProShares UltraShort MSCI Europe as a viable investment option for 2012. It probably is, but the caveat is as a short-term trade.

That's an important note to observe because quiet as it has been kept, critics of leveraged ETFs have a lot of ammo in the form of the ProShares UltraShort MSCI Europe. Why? Because in a year when the ETFs with the most direct Europe exposure have plunged, so has EPV. To the tune of about 10%.

Certainly this would be a major disappointment to the Europe bear that bought EPV in January or February betting that the sovereign debt crisis would escalate. The idea was correct, but EPV has proven to be the wrong way of executing it over an extended time frame.

And what this situation reinforces is the need for those that use leveraged ETFs to head straight to the issuer's Web site before buying one of these ETFs. Here's what ProShares says on its Web site about EPV:

“This Ultra ProShares ETF seeks a return that is 2x the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period.”

Food for thought the next time you think about shorting Europe for anything more than a few days.


Traders who believe that Europe will rebound might want to consider the following trades:
  • Long Royal Dutch Shell (NYSE: RDS-A)
  • Long VGK
  • Long Germany ETFs
Traders who believe that Europe will remain weak may consider alternative positions:
  • Call options on EPV
  • Short-term positions in EPV outright
  • Long the U.S. Dollar
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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