A Popular ETF Play To Be Wary Of
Summary Emerging market stocks and funds have been struggling this year. Many remain pessimistic about the emerging market’s prospects. Nevertheless, some are betting on a turnaround after the selling pressure through leveraged funds. By now, most investors know that emerging markets exchange traded funds and the stock those funds hold have struggled this year. Yet with the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) , the two largest emerging markets exchange traded funds by assets, each down more than 8% this year, rushing to short emerging markets at this juncture may be a case of being too late to a crowded party. Some fund managers believe it will be a while before emerging markets stocks recover in earnest. Investors pulled out of riskier emerging markets as data showed growth from China’s economy slowed, commodity prices fell and the Federal Reserve signaled an interest rate hike this year. The China slowdown is fueling the lower commodity prices and lower outlook for other major emerging economies. Moreover, rising borrowing costs, a stronger dollar and rising corporate debt loads, with the International Monetary Fund warning of corporate defaults, are adding to volatility. “Bank of America Merrill Lynch surveyed more than 200 ‘asset allocators’ in the first week of October. When asked what they thought was the most crowded trade, they said shorting emerging markets, more so than in a September survey. More also viewed shorting emerging market currencies as a crowded trade this month,” reports Dimitra DeFotis for Barron’s . According to a monthly fund manager survey from Bank of America Merrill Lynch, exposure to emerging market stocks remained at a record low, reports Dhara Ranasinghe for CNBC . However, after investors dumped the emerging markets this year, developing country stocks now appear more attractive, especially for long-term investors. Traders of leveraged ETFs have been more comfortable being short emerging markets than long. For example, the ProShares Ultra MSCI Emerging Markets ETF (NYSEArca: EET ) has lost more than $2 million in assets this year while the ProShares UltraShort MSCI Emerging Markets ETF (NYSEArca: EEV ) has seen inflows north of $33 million. ProShares UltraShort MSCI Emerging Markets ETF (click to enlarge) Tom Lydon’s clients own shares of EEM . Share this article with a colleague