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Inverse EM ETFs to Gain as Easy Money Starts Drying Up?

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After a solid 2017, the emerging markets kept steady in the first quarter of 2018 thanks to a synchronized global growth, rising commodity prices, and a subdued dollar. Since the start of this year, the MSCI Emerging Markets Index hovered above the S&P 500 frequently, but the trend snapped after mid-April (read: Is Taper Tantrum Back in 2018? EM ETFs in Focus).

U.S. 10-Year Treasury bond yields crossed 3% in late April for the first time since January 2014. As talks of faster-than-expected Fed rate hikes started doing rounds, U.S. Treasury yields moved higher and the greenback gained strength.

This, in turn, triggered a selling pressure in the emerging markets. Rising rates in the developed world have dulled the demand for higher-yielding securities of EMs. The last three months were especially downbeat EM currencies with WisdomTree Emerging Currency Strategy ETF (CEW) losing about 5% (as of Jun 18, 2018).

Shrinking Global Easy Money

The Fed has already enacted two hikes this year and a big section of policymakers seek two more hikes this year, totaling four hikes in 2018. This is against the Fed’s previous projections of total three rate increases for this year.

The Fed upgraded its forecast for 2018 U.S. real GDP growth from 2.7% in March to 2.8%. PCE inflation expectations were upped from 1.9% to 2.1% for 2018. Federal funds rate projections for 2018 were upped to 2.4% from 2.1% and to 3.1% from 2.9% for 2019 (read: Fed Turns Hawkish: ETF Areas to Win).

In particular, the U.S. economy has been enjoying an edge over the other developed regions, which made the U.S. dollar more compelling and the Fed more conformable in pursuing policy tightening.  Meanwhile, the European Central Bank (ECB) also planned to exit the QE policy by the end of this year. The withdrawal of support from the ECB and Fed may cause an upheaval in the EM space (read: Top and Flop EM ETFs as Taper Tantrum Completes 5 Years).

Inside the EM Fund Exodus

The downtrend in emerging market ETFs has been persistent. Amid broad-based fears about EM investing, investors are extracting funds from even Asian economies with better prospects. Overseas funds are withdrawing from six major Asian emerging equity markets at a clip not seen after the global financial crisis of 2008.

As much as a $19 billion exodus was seen from India, Indonesia, the Philippines, South Korea, Taiwan and Thailand so far this year, per Bloomberg. Apart from the rising rate worry in the developed markets, trade tensions between China and the United States is another tension.

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 - Free Report) – Up 3.6% in the last one month

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 - Free Report) – Up 10.7%

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

ProShares UltraShort MSCI Emerging Markets (EEV - Free Report) – Up 7%

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

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