Bridgewater Slashes EM ETF Exposure; Should You?
Emerging market (EM) weakness has been lately a pain in the neck for global investing, forcing several research houses to cut their global growth forecasts more than once this year. Needless to say, the investing spectrum piled up huge losses with MSCI Emerging Market Index shedding 19% in Q3 – the largest quarterly retreat in four years – instigated by the Chinese market upheaval, per Bloomberg.
Thanks to these sentiments, the world's largest hedge fund, Bridgewater Associates, slashed 41% of its holdings in two EM ETFs – Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets ETF (EEM) – in the third quarter. This step was quite shocking since Bridgewater had been consistent in raising its investments in EM assets in recent years.
Let’s detail why and how you could also take cues from Bridgewater and stay profitable.
The streak of losses in the EM space started long back on a host of factors. First and the foremost was the possibility of a policy tightening in the U.S. So long, EM equities shone on huge foreign direct investment as investors target emerging market stocks and ETFs in search of higher yields (read: Can Emerging Market ETFs Defy U.S. Rates Hike?).
As a result, Fed tightening talks ravaged the emerging market asset classes spurred by fears over the cease in cheap dollar inflows. In 2013, the EM equities were slaughtered in apprehension of a QE taper in the U.S. Though the repetition of the same episode is less likely this year if the Fed enacts a lift-off in December, the investing backdrop is anything but upbeat.
Yes, this time around emerging markets are more resilient and will not crush under the dollar strength like they did in 2013. But the commodity market crash, on the dual dose of greenback strength and demand-supply imbalances, would definitely add shockers to EM investing. Notably, many emerging markets are rich in commodities (read: Emerging Market ETFs in Trouble on Stronger Dollar?).
This was truer given the oil price crash for over more than the last one-year period, which has wrecked havoc on oil-oriented emerging economies like Russia and Columbia. This also dealt a blow to the emerging market currencies (read: 2 Emerging Market Currency ETFs Crushed by Oil Rout).
Upheaval in the Chinese economy and the stock market crushed the global market in August and it is still not out of woods. This episode sent shockwaves to other emerging markets, raising questions on the economic health of the entire EM bloc.
EM growth is also expected to slow in 2015 for the fifth straight year. The two pillars of the BRIC region – Brazil and Russia – will likely slip into recession this year and are likely to face the downtrend next year too. IMF expects the Russian economy to contract 3.8% this year and 0.6% the next, while Brazil's economy is expected to shrink by 3% in 2015 and 1% in 2016. China is also likely to score the most awful growth numbers in more than two decades this year (read: Playing Emerging Markets? Try the New Ex-China ETF).
Another pillar of the BRIC bloc, India, has a decent growth profile. But a slower application of reformative measures and the loss of Prime Minister Narendra Modi’s party in the state election in Bihar, which was viewed as the Indian population’s perception of Modi’s pro-growth policies, stirred confusion over India investing too.
Not only Bridgewater, several hedge funds are outright bearish on emerging markets. As per Bloomberg, Fortress Investment Group LLC indicated that emerging markets are approaching a bear market of a scale seen last during the Asian financial crisis of 1997. Credit crunch in these regions will continue till March 2017 going by the past economic cycles, according to Fortress.
Forum Asset Management also pointed to a lingering pain. According to the Institute of International Finance, investors will haul out about $540 billion from the developing countries this year.
Thus investors finding this investing arena highly fragile might go short on emerging market ETFs and earn smart returns. Below, we highlight three inverse EM ETFs which could be used to tack on gains.
Direxion Daily Emerging Markets Bear 3X ETF (EDZ)
The fund offers three times inverse leveraged exposure to the MSCI Emerging Markets Index. The index includes 21 emerging market countries, namely Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
The fund has amassed about 134.5 million so far and charges 95 bps in fees. EDZ was up about 12.4% in the last one month (as of November 16, 2015).
ProShares UltraShort MSCI Emerging Markets ETF (EEV)
The fund offers two times inverse leveraged exposure to the same index that EDZ follows. It has about $74.6 million in assets and charges 95 bps in fees. EEV was up 8.7% in the last one month.
ProShares Short MSCI Emerging Markets ETF (EUM)
This fund delivers exactly the inverse exposure to the MSCI Emerging Markets Index. The fund has amassed about $419.2 million in assets and charges 95 bps in fees. EUM added over 4.3% in the last one month.
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VANGD-FTSE EM (VWO): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
DIR-EM BEAR3X (EDZ): ETF Research Reports
PRO-ULS MSCI EM (EEV): ETF Research Reports
PRO-SH MSCI EM (EUM): ETF Research Reports
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