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ETFs to Capitalize on Emerging Markets’ Misery

This article was originally published on ETFTrends.com.

Reversing their good fortunes from last year, the emerging markets have been among the worst performing areas of the global markets this year. However, exchange traded funds that take a bearish bet on the developing economies have shined.

Year-to-date, the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares Core MSCI Emerging Markets ETF (IEMG) , the two most popular and largest EM-related ETFs on the market, dipped 8.2% and 8.0%, respectively.

Meanwhile, investors who were wary of pullbacks in the emerging markets capitalized on the decline with inverse or bearish ETF plays. For instance, the ProShares Short MSCI Emerging Markets (EUM) takes the inverse or -100% daily performance of the MSCI Emerging Markets Index, the benchmark to EEM. The ProShares UltraShort MSCI Emerging Markets (EEV) follows the -2x or -200% daily performance of the Emerging Market Index. Additionally, the Direxion Daily Emerging Markets Bear 3x Shares (EDZ) tracks the -3x or -300% performance of the benchmark. Year-to-date, EUM rose 7.4%, EEV advanced 12.2% and EDZ increased 16.8%.

In contrast, the short-selling EEV and EDV lost between 28% and 64% over 2017 when the MSCI Emerging Markets Index surged 34%.

Rising Short Interest

The gains in taking a bearish stance on the emerging markets have drawn even more short traders to bet against developing country stocks, Bloomberg reports.

For instance, short interest in the iShares MSCI Emerging Markets ETF (EEM) , one of the largest exchange traded funds dedicated to equities in developing economies, has jumped to $4 billion, the highest amount wagered on further declines in the emerging market ETF since April 2004, according to IHS Markit Data.

Related: How Asian Markets are Responding to Trade Disputes

Emerging markets, one of the best plays of 2017, are now one of the most hated investment locals this year as a strengthening U.S. dollar drags on foreign returns and ongoing trade spate between the U.S. and China adds to volatility.

More recently, fanning the flames of trade war fears, President Donald Trump threatened tariffs on billion of dollars more in Chinese products. Meanwhile, the U.S. dollar Index has strengthened since the start of April - emerging markets have exhibited an inverse correlation to the USD since many borrow in USD-denominated debt and have a higher cost of paying back the loans.

For more information on the developing economies, visit our emerging markets category.