Steer Clear of Leveraged International ETFs

Includes: EET, EFO, EZJ, XPP
by: John Christy

ProShares is adding to its roster of leveraged ETFs. The four new funds are designed to take 200% positions in China, Japan, EAFE and the MSCI Emerging Markets index.

The problems with leveraged ETFs, in general, have been well chronicled. So we won’t get into that here. For readers who are interested, Tristan Yates and Lye Kok have a nice article on the case against leveraged ETFs on Seeking Alpha with a lively discussion in the comment stream. It’s a bit dated, but the general principles still apply. More recently there was a good piece on the subject in Barron’s earlier this year.

The trouble with extending this type of product to the international realm is that the swings in value will be even more violent given that the underlying markets - especially China and emerging markets - are already extremely volatile in their own right. If a market is moving +/- 5% each day, there’s not much point in goosing that up with more leverage unless you’re a phenomenally skilled day trader. In the hands of a surgeon, a scalpel is a wonderful, life-saving tool. In the hands of a toddler, it’s a nightmare.

A broader problem is that these funds just encourage the wrong mindset about international investing. It’s wonderful to see more American investors finally embracing international investing after generations of investing most of their money at home. And bravo to the investment management industry for giving them innovative tools to invest in these markets, which were once all but off-limits to small investors. But when we start talking about making hopped up day trades on Chinese stocks, we’re taking a step backward, not forward.

Disclosure: No positions