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Short ETFs make a killing in emerging markets

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It’s the investing world’s equivalent of “MacKenna’s Gold:” death is probable, but if you survive, the reward is unimaginable wealth.

As emerging-market stocks extend a $3.8 trillion rout, ETFs that short-sell them — sometimes borrowing money on top of their investors’ capital — are making annualized returns of as much as 190%, according to data compiled by Bloomberg. That contrasts with long-only ETFs that have lost about 18%, or an annualized 35%, since the slump began in late January.

The best performer in this pack is the Direxion Emerging Markets Bear 3X Shares ETF (EDZ) that seeks daily returns of 300% in the opposite direction to the move in the MSCI Emerging Markets Index. It aims to achieve the results by taking both leveraged and unleveraged exposure to the equity gauge.

The ProShares UltraShort ETF (SDS) seeks to make 200% inverse returns related to the benchmark gauge, while the more conservative ProShares Short MSCI Emerging Markets ETF (EUM) satisfies itself with advancing 1% for every percent lost by the index.

The gains are drawing more short traders to bet against developing-nation stocks. Short interest in the iShares MSCI Emerging Markets ETF (EEM) has jumped to $4 billion, the highest amount wagered on further equity declines since April 2014, according to IHS Markit data.

Trump’s call for tariffs on steel and aluminum imports, and subsequent worries of a trade war, have recently taken a toll on emerging markets investments.
March 7

The message from ETF investors is that they like shorting emerging-market stocks now, though they are uneasy about leveraging to do so. The 2X and 3X bear funds haven’t received inflows in the past two weeks, though the ProShares fund that moves opposite to stocks without trying to multiply returns has received five successive weeks of inflows.

The short-selling ETFs lost between 28% and 64% during 2017, when the MSCI gauge advanced 34%.

Bloomberg News