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Inverse EM ETFs to Gain as Currency Turmoil Deepens

Sanghamitra Saha
Starbucks (SBUX) shares rose nearly 10% in the last trading session, amid huge volumes.

Emerging markets appear to have braced for a difficult September as the bloc started the month on a somber note. iShares MSCI Emerging Markets ETF EEM was off about 2% on Sep 4. This year has been rough for the EM segment with EEM losing about 11.8% so far. The crisis deepened in August with Turkish lira being on a freefall due to a diplomatic tussle with the United States as well as a worsening economy (read: Turkey Issue Hurt EMs in August: 5 Least-Hurt ETFs).

Apart from Turkey, Argentina has also been posing threats to the EM stability, with the peso suffering its largest one-day drop in three years on Aug 29 amid concerns that president Mauricio Macri's policy to cut government spending and avoid a recession will likely trigger social conflict that could oust him from presidency (read: Top ETF Stories of August).

Investors should note that the Fed is likely to continue its policy tightening in the days to come. As talks of faster-than-expected Fed rate hikes started doing rounds, U.S. Treasury yields moved higher and the greenback gained strength. The U.S. 10-Year Treasury bond yields rose to 2.90% on Sep 4 from 2.86% on Aug 31.

Invesco DB US Dollar Bullish UUP added about 0.4% on Sep 4. This is especially true given that the U.S. manufacturing activity is hovering at 14-year high. As a result, the greenback soared to its highest level in more than a year. Plus, U.S.-Sino trade tensions is a concern no less.


Naturally, currencies of countries like Brazil, India, South Africa, Indonesia and Russia got badly hit. The Indonesia’s rupiah, “one of Asia’s more vulnerable currencies thanks to Indonesia’s reliance on overseas financing,” nosedived to its weakest level in more than 20 years. India’s rupee is also trading at an all-time low.

If this was not enough, South Africa slipped into recession in the second quarter for the first time since 2009, due to president Cyril Ramaphosa’s efforts to jumpstart the economy after a decade of stagnation. The South African economy shrank 0.7% quarter-on-quarter in Q2 against analysts’ expectations of 0.6% expansion. The news sent rand incurring losses against the dollar to more than 2% on Sep 4. WisdomTree Emerging Currency Strategy ETF CEW was off 1% on Sep 4 and has lost 4.6% in the past month.

Inverse EM ETFs

Against this backdrop, investors can take a look at some inverse emerging market ETFs. As a caveat, investors should note that such products are suitable only for short-term traders. Still, for ETF investors who are bearish on the emerging markets for now, a near-term short could be intriguing for those with a high-risk tolerance.

Proshares Short MSCI Emerging Markets EUM – Up 2.1% on Sep 4

The fund corresponds to the inverse of the daily performance of the MSCI Emerging Markets Index (read: How to Play King Dollar's Best Week Since 2016 With ETFs).

Direxion Daily MSCI Emerging Markets Bear 3x Shares EDZ – Up 5.9% on Sep 4

The fund gives 300% of the inverse of the price performance of the MSCI Emerging Markets Index.

ProShares UltraShort MSCI Emerging Markets EEV – Up 4.4% on Sep 4

The fund offers twice (200%) the inverse (opposite) of the daily performance of the MSCI Emerging Markets Index.

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DIR-EM BEAR3X (EDZ): ETF Research Reports
WISDMTR-EMG CUR (CEW): ETF Research Reports
PRO-SH MSCI EM (EUM): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
PWRSH-DB US$ BU (UUP): ETF Research Reports
PRO-ULS MSCI EM (EEV): ETF Research Reports
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