While it might be tempting to bet on an emerging market (EM) recovery given the pandemic has beaten many down EM assets into oblivion, the pressure may not relent if U.S.-China tensions continue to heighten.

As the U.S. election nears, U.S. President Donald Trump may reinforce his tough stance on China, especially in light of the recent pandemic where he pointedly blamed China for the impact of the coronavirus.

“The market mood had been rather constructive until recently,” said Sebastien Barbe, the Paris-based head of emerging-market research at Credit Agricole CIB. “However, more clouds have been accumulating in the emerging-market sky over the past few days, particularly as US-China tensions have been re-emerging. The issue of the degree of independence of Hong Kong vis-à-vis Beijing is now reappearing, and this could fuel these tensions further, in a way the markets may not like.”

In the meantime, if traders are sensing broader weakness in EM ahead, they can make a relative value exchange-traded fund (ETF) play in the Direxion MSCI Developed Over Emerging Markets ETF  (NYSEArca: RWDE). RWDE provides a means to not only see developed markets perform well, but a way to access a convergence/catch-up in performance of DM relative to EM, a spread that has clearly widened over the past 6 months. The fund seeks investment results, before fees and expenses, that track the MSCI EAFE IMI – Emerging Markets IMI 150/50 Return Spread Index.

The index measures the performance of a portfolio that has 150% long exposure to the MSCI EAFE IMI Index (the “Long Component”) and 50% short exposure to the MSCI Emerging Markets IMI Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value. In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express a developed over emerging investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.

One particular fund that leverage-hungry traders may want to consider is the Direxion Daily MSCI Emerging Markets Bear 3X ETF (NYSEArca: 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.

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