Emerging Markets Bears Prowling With This ETF

July 6, 2018 12:11 pm
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The widely followed MSCI Emerging Markets is flirting with a year-to-date loss of 9.40 percent. On Thursday, 16 emerging markets exchange traded funds hit 52-week lows.

That could present a good opportunity for the Direxion Daily MSCI Emerging Markets Bear 3X Shares (NYSE:EDZ), which plays emerging markets to the downside. 

EDZ is designed to deliver triple the daily inverse returns of the MSCI Emerging Market Index. Translation: EDZ is a volatile bet on a volatile asset class, meaning traders should heed the “daily” part of EDZ's objective and not be seduced by the fund's performance over longer holding periods, as impressive as they may be.

“As emerging-market stocks extend a $3.8 trillion rout, exchange-traded funds that short-sell them — sometimes borrowing money on top of their investors’ capital — are making annualized returns of as much as 190 percent,” according to Bloomberg. “That contrasts with long-only ETFs that have lost about 18 percent, or an annualized 35 percent, since the slump began in late January.”

Why It's Important

Data suggest bearish traders are piling into short positions on the iShares MSCI Emerging Markets ETF (NYSE:EEM) while flows into inverse leveraged emerging markets have lightened up in recent weeks.

“Short interest in the iShares MSCI Emerging Markets ETF has jumped to $4 billion, the highest amount wagered on further equity declines since April 2014, according to IHS Markit data,” Bloomberg noted.

For the 30 days ended July 3rd, flows into EDZ were steady. Over that period the fund averaged daily inflows of nearly $192,000, according to Direxion data. During the same period, traders yanked an average of almost $231,000 per day from EDZ's bullish counterpart, the Direxion Daily MSCI Emerging Markets Bull 3X Shares (NYSE:EDC).

What's Next

EDZ could continue proving useful for short-term traders as 2018 moves along. If trade tensions escalate, Chinese stocks could continue sagging, a relevant point because the MSCI Emerging Markets Index devotes 32.49 percent to China, by far the benchmark's largest country allocation.

Additionally, Brazil, home to one of the emerging world's worst-performing equity markets this year, holds national elections in October. Brazil, Latin America's largest economy, is 5.87 percent of the MSCI index's weight.

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