Dismal Evidence Mounts for Emerging Markets ETFs

Tuesday is proving to be a sea of red for emerging markets exchange traded funds as investors continue to fret about Federal Reserve tapering, the nemesis that pounded developing world equities earlier this year.

Investors have been pulling cash from marquee emerging markets ETFs, such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), in recent days leading to increased interest in bearish leveraged products.

The iShares MSCI Emerging Markets ETF (NYSEArca: EEM), the second-largest emerging markets ETF by assets behind VWO, “has staggered recently, clipping its 200 day MA largely on weakness in Brazil, Taiwan, and South Korea. Not coincidentally, both EEM and related ETF VWO have had a hard time recently in terms of fund flows, losing $>680 million and $975 million respectively,” said Paul Weisbruch of Street One Financial in a note out Tuesday.  [Chart of the Day: Emerging Markets]

Weisbruch notes activity has increased in bearish leveraged fare, such as the Direxion Emerging Markets Bear 3X Share (NYSEArca: EDZ), UltraShort MSCI Emerging Markets ProShares (NYSEArca: EEV), Direxion Daily China 3x Bear (NYSEArca: YANG) and ProShares Short MSCI Emerging Markets ProShares (NYSEArca: EUM), among others.

Adding to the bear case against diversified emerging markets funds was a noticeable options trade in EEM on Monday.

“A trader sold 210,953 November 42.50 puts for $1.60 against previous open interest of 238,704. At the same time, he or she bought 248,663 December 41.50 puts for the ask price of $1.55 in volume well above that strike’s open interest of roughly 76,000, so it is a new position,” according to Options Monster.  “Although it is possible that these puts are a hedge on long stock , it is unlikely because they are in the money . So it appears that this trader is rolling a bearish position out a month and to a lower strike price.”