The story has been well-documented. The second quarter was unkind to emerging markets ETFs. Heading into the start of trading Friday, the last day of the quarter, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) were both sitting on quarterly losses of over 10%.
A look through the 20 to 30 best-performing ETFs of the quarter shows plenty of emerging markets ETFs. Plenty of bearish, inverse funds that is, but bullish ETFs tracking developing world nations have perked up over the past few days and one highly risky fund could be showing signs that emerging markets ETFs may hold some near-term promise. [Q2’s Worst ETFs Have Similarities]
The Direxion Daily Emerging Markets Bull 3X Shares (NYSEArca: EDC) heads into Friday up 17.3% this week. That is how leveraged ETFs work. Gains of 17% or more in less than a full trading week are possible. So are losses of that magnitude. Combine that with the facts that ETFs like EDC are strictly intended to be short-term trading instruments and that emerging markets are far still far from sanguine places to invest, and it is obvious EDC is not a trade all investors should be involved with. [Chile ETF Could be Next to be Hit by Protests]
However, traders are not departing from EDC. In fact, statistics indicate some are embracing this volatile product. EDC shot up 5.8% on Thursday on volume that was nearly double the daily average. Not only that, but since the start of June, a month that has been mostly unkind to emerging markets ETFs, EDC has hauled in almost $73.4 million in assets, according to Index Universe data.
ETF inflows are not always harbingers of forthcoming gains, but flows to EDC could indicate some traders are betting on an emerging markets resurgence. The cautionary tale is that for as quickly as leveraged ETFs run up, they can plummet, reminding investors that those that cannot incur significant losses should not be involved with these types of funds.