This ETF Loves Turkish Turmoil

The 11 percent slide iShares MSCI Turkey ETF TUR took on Monday had a sequel on Friday's open, slumping another 5 percent.  The volume from the initial sell off was more than 12 times the daily average as that country's efforts to prop up its flailing currency, the lira, delivered no positive results.

All told, TUR is off 25 percent from its August high. Although Turkey is a negligible part of the MSCI Emerging Markets Index, that benchmark is wilting in the wake of the Turkish turmoil and is off 3.2 percent over the pat week.

What Happened

What is bad for Turkish stocks and the broader emerging markets complex is beneficial to the Direxion Daily MSCI Emerging Markets Bear 3X Shares EDZ. EDZ is designed to deliver triple the daily inverse returns of the MSCI Emerging Markets Index.

On Monday, EDZ jumped 4.8 percent on above-average volume, extending its one-week gain to 9.6 percent. With the entire week's gains, EDZ is up nearly 20 percent this month, making it one of the best-performing inverse leveraged funds in Direxion's lineup.

Why It's Important

EDZ's recent bullishness is important because the slump in Turkish stocks is punishing other emerging markets. For example, Direxion's three worst-performing leveraged bullish funds last Friday were each emerging markets ETFs. On Monday, 40 emerging markets ETFs hit 52-week lows.

“There are only three options to halt the freefall of the Turkish lira,” tweeted Dani Rodrik, an economist at Harvard University. “1. Sell dollars at the expense of using up the central bank’s reserves. 2. Announce a serious rate hike. 3. Capital controls. Choose your poison.”

What's Next

The near-term outlook is murky at best for Turkish assets with few, if any, market observers willing to openly voice bullish opinions. That favors the bearish EDZ, but traders should remember EDZ should be deployed as a short-term trade.

Turkish equities are significantly more volatile than broader emerging markets benchmarks and any snap-back buying there would punish EDZ while favoring the fund's bullish counterpart, the Direxion Daily MSCI Emerging Markets Bull 3X Shares EDC. EDC looks to deliver triple the daily returns of the MSCI Emerging Markets Index.

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