Emerging Markets: Emerging Short Opportunity?

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After a bumper year of returns in 2017, emerging markets have copped a battering in 2018. From slowing economic growth in China to Turkey’s currency, the lira, collapsing – all occurring in the backdrop of volatile Latin American presidential elections, trade wars and a buoyant U.S. dollar that is making it difficult for indebted emerging market countries to pay their debts – it’s easy to understand why these so-called “growth” markets haven’t treated investors kindly this year.

“This is not over by any means,” Andrew Brenner, a global strategist at National Alliance Capital Markets, told CNBC. “The longer the Federal Reserve (Fed) takes easing away, the more they’re tightening, the more trouble for emerging markets, and we haven’t seen the worst of it,” he added.

Traders who believe that the challenges facing emerging markets won’t resolve themselves overnight should consider taking a play against these markets using inverse exchange-traded funds (ETFs). Let’s look at several current trading opportunities.

Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ)

Launched in 2008, the Direxion Daily MSCI Emerging Markets Bear 3X ETF aims to return three times the inverse daily performance of the MSCI Emerging Markets Index. The underlying index has a tilt toward financial and technology firms in China, Korea and Taiwan but also includes exposure to companies in India, Brazil and Mexico. As of Nov. 9, 2018, EDZ has $90.39 million in assets under management (AUM) and offers a 0.26% dividend yield. The fund charges a 0.96% annual management fee and has a year-to-date (YTD) return of 18.4%.

EDZ’s share price has tracked steadily higher throughout 2018. Sentiment turned bullish when the 50-day simple moving average (SMA) crossed above the 200-day SMA, known by technical analysts as a “golden cross,” in early July. Those wanting to bet against emerging markets should look for an entry point at $53.5, where the fund’s price is likely to find support from a nine-month uptrend line that connects multiple swing lows. A stop-loss order could sit below the September swing low, while the Oct. 29 YTD high of $73.3 is a suitable area to take profits.

Chart depicting the share price of the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ)

ProShares UltraShort MSCI Emerging Markets ETF (EEV)

Formed in 2007, the ProShares UltraShort MSCI Emerging Markets ETF attempts to replicate twice the inverse daily performance of the MSCI Emerging Markets Index. The fund, with AUM of $25.16 million, is ideal for swing traders who want to take a modest bet against emerging markets. EEV has an average spread of 0.2% with roughly 40,000 shares changing hands daily. As of Nov. 9, 2018, the fund is trading at $50.16, yields 0.14% and has a YTD return of 14.4%. Its expense ratio of 0.95% is in line with the 0.94% category average.

The share price of EEV rallied strongly in October as global equity markets took a bath. The move higher was accompanied by above-average volume, suggesting institutional buying. EEV’s price has started November by pulling back to an established uptrend line at the $48 level that offers traders a buy-in opportunity. The relative strength index (RSI) is trading below 50, giving the trade plenty of upside room before reaching overbought conditions. Traders could position their stop below the current swing low and aim to exit with profits near last month’s high at the $58 level.

Chart depicting the share price of ProShares UltraShort MSCI Emerging Markets ETF (EEV)

ProShares Short MSCI Emerging Markets ETF (EUM)

The ProShares Short MSCI Emerging Markets ETF, also created in 2007, seeks to provide the inverse daily performance of the MSCI Emerging Markets Index. The fund, with over $250 million in net assets, has average daily trading volume (ADTV) of $19.03 million and a narrow average spread of 0.05%, making it a suitable instrument for short-term traders. EUM has a 9.46% YTD return, a 0.95% expense ratio and pays investors a dividend yield of 0.22% as of Nov. 9, 2018.

EUM tracks the same index as EDZ and EEV; therefore, its chart is similar to the first two ETFs discussed. The fund’s price has consistently bounced off the uptrend line that dates back to late February, which makes the current retracement to the trendline at the $19.5 level a high-probability buying area. Traders should protect their capital with a stop placed slightly below the uptrend line and consider taking profits close to the late October swing high, where the fund’s price may encounter some resistance.

Chart depicting the share price of the ProShares Short MSCI Emerging Markets ETF (EUM)



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