If the Emerging Markets Cool, You'll Want Shares of this New ETF
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By Nathan Slaughter Editor, The ETF Authority Visit this link to learn more about this premium newsletter. View our subscription options for The ETF Authority. |
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As the name implies, UltraShort MSCI Emerging Markets ProShares (AMEX: EEV, $74.16) offers investors an easy way to short, or bet against, the MSCI Emerging Markets Index.
Specifically, the fund is designed to provide approximately double the inverse of the daily return of the MSCI EM Index. For example, on a day when the underlying benchmark drops -2%, EEV shareholders can reasonably expect to see gains (before fees and expenses) of +4%.
The math doesn't always work out to the penny over the long-haul, but the premise is simple enough: bad news for emerging market stocks is great news for this fund, and vice-versa.
ProShares offers a growing assortment of funds geared to move in the opposite direction of an underlying basket of stocks — whether it's a broad index like the Russell 2000 or even a specific industry group such as financial services. Think that small-caps will bear the brunt of a recession-driven pullback? Convinced that there is more misery ahead for the banking sector? Then these funds would be the way to go.
Of course, in the case of emerging market stocks, an inverse fund (particularly a leveraged one that magnifies returns) would have been the last place you wanted to invest — at least until recently. Investors have pumped $13.5 billion into emerging market ETFs so far this year, and it's easy to see why: the benchmark MSCI EM Index has delivered red-hot annual gains of +34% over the past three years.
However, emerging market equities are also notoriously volatile and will likely be one of the harder-hit areas in the event of a global sell-off. To give you a glimpse of that, when the market tumbled on November 21st, the iShares MSCI Emerging Markets Fund (AMEX: EEM) suffered a steep -5% decline, while EEV soared around +9%.
For those that think the emerging markets are overheated and prone to even deeper declines, then this fund is for you.
Our View —> ProShares launched this fund (and a non-leveraged version — Short MSCI Emerging Markets ProShares (AMEX: EUM)) in early November and has since followed up with a fund that takes a similar approach in China (where stocks have soared +600% over the past five years).
Over the long-haul, we think the emerging markets story is one worth telling, but investors should expect a few plot turns along the way. Still, we don't engage in day-to-day market timing and won't attempt to speculate on what emerging markets will do over the next few weeks.
However, we do believe that this fund could be a useful hedging tool for investors with considerable exposure to these stocks. For those that want to protect profits without closing out their positions (and triggering hefty capital gains taxes), then EEV may be the answer.
Also, for anyone interested in shorting other indices or sectors, we should point out that Rydex is busy launching a wave of inverse funds with expense ratios of 0.70% — versus 0.95% for ProShares.
Good investing!
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