Traders are Getting It Wrong With Leveraged Emerging Markets ETFs

There is no shortage of anecdotes and data points illustrating the woes being encountered by emerging markets stocks and the corresponding exchange traded funds. Over the past 90 days, 19 of the 40 worst-performing non-leveraged ETFs are emerging markets funds.

The iShares MSCI Brazil Capped ETF EWZ is the “best” performer of that group with a loss of almost 28 percent. Diversified emerging markets funds are offering no shelter from the storm, either, as the Vanguard FTSE Emerging Markets ETF VWO and the iShares MSCI Emerging Markets ETF EEM, the two largest emerging markets ETFs by asset, are each off 24 percent over the past three months.

Tumbling developing world stocks are opening the door to some compelling opportunities for risk-tolerant, short-term traders with bearish leveraged emerging markets ETFs. Whether or not those traders are taking the opportunities is a different story. The triple leveraged plays on the MSCI Emerging Markets Index paint the picture of lost opportunity with inverse leveraged emerging markets ETFs.

The Direxion Emerging Markets Bear 3X Shares EDZ, which attempts to deliver three times the daily inverse of the MSCI Emerging Markets Index, has more than doubled over the past 90 days. EDZ's bullish counterpart, the Direxion Emerging Markets Bull 3X Shares EDC has lost 58 percent over that span. Not surprisingly, it is EDZ that is falling victim to outflows in the current quarter. Traders have yanked $21.3 million from EDZ but have allocated nearly $51 million to EDC since the start of July.

EDZ is merely Direxion's third-best inverse leveraged on a month-to-date basis, according to issuer data, yet it goes unloved by traders. Maybe traders are doing exactly what they should be with EDZ. That is moving in and out of the fund after a day or a few day of holding it. Over the past five days, EDZ's volume has been more than 87 percent above the 20-day average, according to Direxion data. 

“Not surprisingly” because this is a scenario that has been examined several times in recent weeks. Take the case of leveraged Brazil ETFs. The Direxion Daily Brazil Bull 3x Shares BRZU is just a few days more than three months past a 1-for-10 reverse split and the fund has shed more than two-thirds of its post-split. Oh, don't worry. Traders are preferring BRZU to its bullish counterpart, the ProShares UltraShort MSCI Brazil ETF BZQ.

BZQ's 73.4 percent over the past 90 days has not been enough to prevent $15 million in third-quarter outflows, but nearly $21.5 million has gone into BRZU. 

As we noted on Monday, similar chicanery is afoot with the Direxion Daily Russia Bull 3x Shares RUSL and the Direxion Daily Russia Bear 3x Shares RUSS. The former is flailing but taking in new money while the latter surges and bleeds assets. 

These scenarios highlight the bullish bias nearly all investors are born with and so many work so diligently to overcome. It is traders' and investors' predilection for bullishness that explains why the bearish leveraged India, Latin America, South Korea ETFs and Direxion's bearish answer to BRZU no longer exist. If those ETFs were still around, chances are they would be soaring these days...and not attracting much money.