Emerging markets showed strong growth momentum last year when the developed economies like the U.S. and Europe were handling their fiscal issues. However, growth in the first quarter of 2013 remained subdued as weak operations in Brazil, India and Russia outweighed the decent growth in China (read: Time to Buy Emerging Market ETFs?).
Some are growing more optimistic on these nations going forward though, and are looking for new leveraged options in the space. With this trend in mind, Direxion, best known for its huge lineup of geared ETFs, plans to launch two emerging market leveraged ETFs with triple exposure (3X) resetting on a daily basis.
Both are the first bull ETFs to provide exposure of three times their respective markets, with BRZU focusing in on Brazil, and KORU honing in on stocks from South Korea.
Direxion Daily Brazil Bull 3X Shares (BRZU)
Brazil has been struggling in recent months due to slower GDP growth rate and persistent inflation. However, with growth in manufacturing, improving retail sales, increased consumer spending, and a surge in domestic demand, the Brazilian economy appears to be on the path to recovery.
The Brazilian economy is expected to grow 3.5% this year and 4% in the next, as per the International Monetary Fund forecast (read: Will Brazil ETFs Rebound in 2013?).
Additionally, the government is taking several steps to boost growth in the country with tax cuts and cheap investments. It is also seeking a flexible monetary policy that could lead to possible interest rate hikes in order to tame inflation. The Brazilian currency is also strengthening, signaling strong growth prospects for the nation.
With this optimism, investors can now consider BRZU to make a bullish bet on this emerging economy. The ETF looks to deliver three times (300%) the daily performance of the MSCI Brazil 25-50 Index, before fees and expenses.
The product will create a leveraged long position in the underlying index through the use of swaps, options, future contracts and other financial instruments. The fund will be a bit pricey though, charging 95 bps in fees per year.
In terms of exposure, financials take up the biggest chunk at 26% of the benchmark, followed by materials, and consumer staples. Energy takes the fourth spot in the index, while the benchmark will focus in on large and mid caps.
The new ETF looks to follow the same trend as the ultra-popular MSCI Brazil Index Fund (EWZ), which tracks the unleveraged performance of the same index (read: Is It Time to Buy the Brazil ETF (EWZ)?). This means that if EWZ moves up by 1%, then BRZU will move up by 3% and vice versa, at least over a single trading session.
For comparison purposes, EWZ has lost 1.43% so far the year, while it has seen a sluggish performance over the past two years, losing about 30%.
Direxion Daily South Korea Bull 3X Shares (KORU)
South Korea, Asia’s fourth largest economy and one of the most stable in the region, is currently the center of the ongoing political turmoil that has weighed heavily on investors. The economy which has long been facing troubles from the Euro-zone crisis due to poor exports has been made more vulnerable by the rising won (read: Three Country ETFs Struggling in 2013).
This makes exports even more expensive, especially when compared to Japanese goods which have seen a depreciating yen. This is important as Japan often comes into direct competition with the nation so its exports could be viewed as pricey by some international buyers.
Still, South Korea remains a center of innovation and tech prowess, and Korean ETFs are among the only options for investing in the giant of Samsung. Furthermore, many might view the current North Korean situation as overblown, suggesting that the country could be bought on a dip here.
This is especially true given some of the growth prospects for South Korea this year, and government predictions for growth. In fact, the finance ministry of South Korea expects the economy to demonstrate a mild recovery in 2013 and a very modest growth rate of 2.3%.
In this environment, investors, who want to invest in the country could find the new KORU an exciting pick. The ETF looks to provide triple exposure to the daily performance of the MSCI Korea 25/50 Index (read: Is the Korea ETF About To Breakout?).
This fund will also create a leveraged long position in the underlying index through the use of swaps, options, future contracts and other financial instruments while charging 95 bps in annual fees.
This ETF looks to move in the same trend with iShares MSCI South Korea Index Fund (EWY), an ultra-popular fund which tracks the unleveraged performance of the same index (see more in the Zacks ETF Center). This means that if EWY moves up by 1%, then KORU will move up by 3% and vice versa, at least over a single trading session.
For comparison purposes, EWY lost 13% in the year-to-date timeframe, while it has slumped by a similar amount over the past two year period.
Can They Succeed?
With improvements in the U.S. equity markets and signs of recovery in these two emerging markets, it would not be surprising to see huge inflows in both these bull strategy ETFs. Being the first two bull funds in the Brazilian and South Korean markets, both will enjoy the first-mover advantage which could also help these to succeed.
“We conduct market analysis and reviews on a constant basis in order to identify new opportunities in various regions and sectors for sophisticated investors who actively manage their trading positions,” said Eric Falkeis, President of Direxion in a press release.
“Brazil and South Korea are emerging markets with many successful commodity, technology and automobile companies. Direxion is allowing investors to not only obtain more surgical exposure to these booming economies, but also to leverage their performance through innovative investment products.”
However, investors should note that the leveraged ETFs involve a great deal of risk when compared to traditional ETFs. These products are only designed to match the performance of an index over a single trading session, leading to possible deviations in the long-term performance of these securities when compared to unleveraged versions (read: Top 5 Leveraged Equity ETFs YTD).
Still, for traders looking to make bullish short-term bets on South Korea or Brazil, the options have now greatly increased thanks to Direxion. 3x leverage can be a powerful tool, so just be careful with these interesting products that are targeting some of the more volatile emerging markets out there.
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