ETFs to Capitalize on Emerging Markets' Misery

Reversing their good fortunes from last year, the emerging markets have been among the worst performing areas of the global markets this year. However, exchange traded funds that take a bearish bet on the developing economies have shined.

Year-to-date, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), the two most popular and largest EM-related ETFs on the market, dipped 8.2% and 8.0%, respectively.

Meanwhile, investors who were wary of pullbacks in the emerging markets capitalized on the decline with inverse or bearish ETF plays. For instance, the ProShares Short MSCI Emerging Markets (NYSEArca: EUM) takes the inverse or -100% daily performance of the MSCI Emerging Markets Index, the benchmark to EEM. The ProShares UltraShort MSCI Emerging Markets (NYSEArca: EEV) follows the -2x or -200% daily performance of the Emerging Market Index. Additionally, the Direxion Daily Emerging Markets Bear 3x Shares (NYSEArca: EDZ) tracks the -3x or -300% performance of the benchmark. Year-to-date, EUM rose 7.4%, EEV advanced 12.2% and EDZ increased 16.8%.

In contrast, the short-selling EEV and EDV lost between 28% and 64% over 2017 when the MSCI Emerging Markets Index surged 34%.

Rising Short Interest

The gains in taking a bearish stance on the emerging markets have drawn even more short traders to bet against developing country stocks, Bloomberg reports.

For instance, short interest in the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), one of the largest exchange traded funds dedicated to equities in developing economies, has jumped to $4 billion, the highest amount wagered on further declines in the emerging market ETF since April 2004, according to IHS Markit Data.