With a macroeconomic event like global inflation, it could benefit traders to rely on their notions that what’s happening domestically is also hitting other countries abroad. That’s especially the case when it comes to emerging markets (EM), but it also opens up opportunities for inverse exchange traded funds (ETFs) like the Direxion Daily MSCI Emerging Markets Bear 3X ETF (EDZ).
While EM countries could typically give investors diversified exposure where other countries could be experiencing different stages in the economic cycle, the current market is different given the rising tide of inflation. Add a stronger dollar to the mix, and emerging markets have been feeling the pain as the U.S. Federal Reserve continues to tighten monetary policy.
With EM countries in particular, performance of the local currency has a profound effect on the performance of its equities. Given this, a rising dollar has been decimating local currencies, making it difficult since the conversion of the local currency to the dollar devalues the associated EM currency.
A weaker currency means capital markets across the board for EM suffer, which makes for potential inverse trading plays. One such play to consider is EDZ.
EDZ seeks daily investment results of 300% of the inverse of the daily performance of the MSCI Emerging Markets IndexSM. The fund invests in swap agreements, futures contracts, short positions, or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index equal to at least 80% of the fund’s net assets.
Capitalizing on China’s Weakness
As the second-largest economy, it can be easy to forget that China is still classified as an EM country. While China is also feeling the pain of rising global inflation, it has its own problems, which makes for another inverse play in the Daily FTSE China Bear 3X Shares (YANG).
YANG seeks daily investment results equal to 300% of the inverse (or opposite) of the daily performance of the FTSE China 50 Index. The index consists of the 50 largest and most liquid public Chinese companies currently trading on the Hong Kong Stock Exchange.
The country is still feeling the pain of a COVID resurgence and real estate development woes. As such, its economy is still suffering and so will indexes that also have China exposure.
“China’s stock market extended already steep declines, battering widely followed emerging-markets indexes and funds with heavy weightings in the country,” a Morningstar article noted. “Last week, the Morningstar China Index fell 8.6%—its worst weekly drop since February 2021—following the close of the latest government’s ruling party congress. On Oct. 24, the index lost 7.5% for its second-largest drop in 14 years.”
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