Will a Short-Term Rally Translate to Long-Term Gains for EM?

Emerging markets (EM) got a short-term boost last Thursday en route to a weekly gain on hopes that lesser coronavirus cases and a weakening dollar would spur more investors to take on risk assets like EM. However, is this rally just a flash in the pan or are long-term gains ahead?

Right now, it’s anybody’s guess as the coronavirus remains the wild card in the markets. Even if the pandemic passes, the economic toll it could bring will have ramifications for both emerging and developed markets alike.

“Sentiment in markets continues to shift like a yo-yo, but signs that the coronavirus curve continues to flatten in the worst affected countries are very positive,” Stephen Innes, chief market strategist at financial services firm AxiCorp wrote in a note. “Equities continue to rally and with a lot of cash on the sidelines, provided the COVID-19 data proves reliable; this move can have legs even more so if OPEC and friends formulate a credible response that puts a floor under oil price.”

Investors looking to get emerging market exposure can look to funds like the SPDR Portfolio Emerging Markets ETF (SPEM). SPEM seeks investment results that correspond generally to the total return performance of the S&P Emerging BMI Index, which is a market capitalization weighted index designed to define and measure the investable universe of publicly traded companies domiciled in emerging markets.

Is EM Strength Up Ahead?

For investors looking for the continued upside in emerging market assets, whether driven by a weakening USD or continued developments around trade, the Direxion MSCI Emerging Over Developed Markets ETF (NYSEArca: RWED) offers them the ability to benefit not only from emerging markets potentially performing well but from emerging markets outperforming developed markets.

RWED seeks investment results that track the MSCI Emerging Markets IMI – EAFE IMI 150/50 Return Spread Index. The Index measures the performance of a portfolio that has 150 percent long exposure to the MSCI Emerging Markets IMI Index and 50 percent short exposure to the MSCI EAFE IMI Index.

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 an emerging over developed investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.

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