Playing Emerging Markets With Leveraged ETFs

by: Bennington Investment Ideas

Many investors seek emerging market investment opportunities to capture the both diversification benefits as well as tap into economies that are often growing more rapidly than the United State’s economy. Casual investors have a wide variety of options to invest in emerging markets ranging from ETFs to mutual funds to individual stocks.

The most bullish (or bearish) investors can amplify their exposure to these markets through leveraged emerging market ETFs. Most of the ETFs focus on emerging markets in general or specific regions; however, a few focus on specific countries, namely China, India, Mexico and Brazil. While I’ve searched several sources to complete this list, it might not be exhaustive of all possible options.

Furthermore, with increasing interest in ETF products, I would expect new options to emerge.

Leveraged Emerging Market ETFs

Ticker Name Geography Benchmark ETF Leverage Assets ($ Millions)
EDZ Direxion Daily Emrg Mkts Bear 3X Shares All EEM -3x 92.1
EDC Direxion Daily Emrg Mkts Bull 3X Shares All EEM 3x 343.6
EET ProShares Ultra MSCI Emerging Markets All EEM 2x 35.5
EEV ProShares UltraShort MSCI Emerging Mkts All EEM -2x 90.1
UBR ProShares Ultra MSCI Brazil Brazil EWZ 2x 16.3
BZQ ProShares UltraShort MSCI Brazil Brazil EWZ -2x 16.4
BRIS Direxion Daily BRIC Bear 2X Shares BRIC EEB -2x 2.4
BRIL Direxion Daily BRIC Bull 2X Shares BRIC EEB 2x 4.7
CZI Direxion Daily China Bear 3X Shares China ? -3x 8.7
CZM Direxion Daily China Bull 3X Shares China ? 3x 62.9
XPP ProShares Ultra FTSE China 25 China FXI 2x 48.0
FXP ProShares UltraShort FTSE China 25 China FXI -2x 175.7
INDZ Direxion Daily India Bear 2X Shares India PIN -2x 3.8
INDL Direxion Daily India Bull 2X Shares India PIN 2x 33.0
LHB Direxion Daily Latin America Bear 3X Shs Latin America ILF -3x 3.0
LBJ Direxion Daily Latin America Bull 3X Shs Latin America ILF 3x 39.4
UMX ProShares Ultra MSCI Mexico Mexico EWW 2x 2.2
SMK ProShares UltraShort MSCI Mexico Mexico EWW -2x 2.4

Source: Yahoo!Finance downloaded on June 6, 2011

One of the challenges of using these ETFs is that some have very limited sizes and lack liquidity. Furthermore, these securities face the challenges of any leveraged ETF as I discussed in my article Taking a Closer Look at Leveraged ETFs.

The following table highlights the varying levels of liquidity based on the last 3 months of trading volume.

Average Daily Trading Volume Last Three Months

Ticker Closing Price June 6, 2011 3 Month Average Daily Volume Average Daily Value Traded /Assets
EDZ 18.86 1,506,800 30.9%
EDC 36.58 2,290,980 24.4%
EET 104.33 14,631 4.3%
EEV 30.61 615,977 20.9%
UBR 31.86 20,025 3.9%
BZQ 15.81 68,756 6.6%
BRIS 26.11 1,803 2.0%
BRIL 41.04 5,345 4.7%
CZI 15.74 53,708 9.7%
CZM 42.90 79,394 5.4%
XPP 73.09 41,581 6.3%
FXP 27.67 425,448 6.7%
INDZ 28.15 13,347 9.9%
INDL 39.05 31,330 3.7%
LHB 17.92 17,684 10.6%
LBJ 31.16 70,591 5.6%
UMX 37.47 1,441 2.5%
SMK 52.75 905 2.0%
EEM 47.10 59,668,100 6.7%
EWZ 73.09 13,685,200 7.6%
EEB 44.44 104,053 0.6%
FXI 43.28 15,742,200 8.3%
PIN 22.61 479,322 1.9%
ILF 50.35 1,541,230 2.9%
EWW 59.46 2,585,550 8.5%

Source: Yahoo!Finance downloaded on June 6, 2011

The above table clearly illustrates the most leverage emerging market ETFs tend to have significantly less liquidity than their benchmark ETFs. In some cases, trading volume is extremely thin for the country specific ETFs. These thinly traded issues will increase transaction costs for investors and erode returns due to larger bid ask spreads.

These leveraged ETFs track a variety of indices as noted in the first table. It is very possible that there is more than one ETF that tracks the appropriate index. The following are quick overviews of each of these benchmark ETFs.

  • iShares MSCI Emerging Index Fun (NYSEARCA:EEM) - One of the largest emerging market ETFs by assets with over $41 billion, EEM tracks the MSCI Emerging Markets Index. EEM is highly diversified across sectors with the largest exposure to financial services at 23% and then basic materials at 15%. EEM does not carry significant exposure to any one company with large stakes in Petrobras, POSCO, and Gazprom. EEM yields about 1.3% and pays somewhat consistent dividends. EEM has about 93% correlation to ILF.
  • iShares MSCI Brazil Index Fund (NYSEARCA:EWZ) - EWZ is the leading Brazilian ETF and tracks MSCI Brazil Index (as one would expect from the name.) EWZ is much more concentrated with large exposures to basic materials (28%) and financial services (23%) and energy (17%). EWZ performance is primarily driven by the Brazilian megacap stocks: Petrobras (NYSE:PBR), Vale (NYSE:VALE), Itau Unibanco Holding SA (NYSE:ITUB), AMBEV (ABV), Banco Bradesco SA (NYSE:BBD), and Banco Santander SA (NYSE:BSBR). EWZ has an attractive yield at 3.7%, but like many Latin American securities it pays somewhat irregular dividends and the 3.7% is reflective of an unusually large dividend in December 2010.
  • Guggenheim BRIC ETF (NYSE:EEB) - EEB has abour $740 million in assets and tracks the Bank of New York Mellon BRIC Select ADR Index. This ETF carries significant exposure to Brazil and is concentrated on about 4 sectors: Basic Materials, Financial, Energy, and Communication. Its yield is about 1.8%.
  • iShares FTSE China 25 Index Fun (NYSEARCA:FXI) - FXI has about $8.2 billion in assets and is highly liquid. It is one of many options to gain exposure to Chinese markets. According to Yahoo!Finance it is heavily concentrated on financial services with over 50% of its assets in those stocks. Its yield is about 1.4% PowerShares Golden Dragon Halter USX China (NASDAQ:PGJ) offers a more diversified portfolio with a yield of 0.6%. PGJ does not quite have the same level of liquidity.
  • PowerShares India Portfolio (NYSEARCA:PIN) - PIN has assets of about $570 million and is quite liquid. PIN is also reasonably diversified across sectors with Energy as the largest exposure at 25%. It is also more diversified across companies than EWZ. Top holdings include Reliance, Wipro, Infosys, Ong Corp, and HDFC Bank. PIN offers a yield of about 1.0%.
  • iShares Latin America 40 Index (NYSEARCA:ILF) - As expected ILF carries significant exposure to both Brazil and tracks the S&P Latin America 40 INdex. It has $2.7 billion in assets and is also very liquid. Its largest holdings are also the Brazilian megacaps. ILF has a 4 year correlation of 98% to EWZ and only 86% to EWW. ILF offers a yield of about 2.1%.
  • iShares MSCI Mexico Index Fund (NYSEARCA:EWW) - EWW has $1.8 billion in assets and is very liquid. EWW also carries a heavy sector concentration with 72% of its assets in either Communications , Consumer Defensive, or Basic Materials. Its largest holdings include America Movil S.A.B. de C.V.(NYSE:AMX), Wal-Mart De Mexico SAB de CV , and Fomento Económico Mexicano, S.A.B. De C.V. EWW has a yield of about 0.8%. For comparison sake, EWW is correlates at 82% to EWZ.

The following table shows the correlations for the past 39 months for the benchmark ETFs. This was limited due to the short history of PIN.

Benchmark Emerging Market ETF Correlations

ILF 100.0% - - - - - -
EWZ 98.6% 100.0% - - - - -
EWW 89.9% 82.7% 100.0% - - - -
EEM 95.2% 92.9% 91.4% 100.0% - - -
PIN 82.8% 80.6% 79.7% 87.6% 100.0% - -
FXI 81.9% 82.0% 81.5% 86.9% 81.1% 100.0% -
EEB 98.0% 98.3% 86.5% 96.3% 85.8% 87.5% 100.0%

Source: Derived from monthly closing dividend and split adjusted prices from Yahoo!Finance downloaded on June 6, 2011. Correlations are based upon monthly returns.


While leveraged emerging market ETFs may provide a good way to play emerging markets, they do carry additional risks due to lower liquidity and general risks of leveraged ETFs. In making short term bets, I would stick to EDC and EDZ due to their higher liquidity. I would avoid illiquid ETFs like BRIS, BRIL, SMK and UMX.

This analysis was also quite eye opening in terms of the significant correlations among the benchmark ETFs. ILF essentially looks the same as EWZ and EEB. Even India (PIN) was highly correlated to the other ETFs. This simply suggests to the investor seeking emerging market diversification to look past the usual suspects. These ETFs ranged from 75% to 90% in correlation to SPDR S&P 500 Trust ETF (NYSEARCA:SPY).

Disclosure: I am long FXI, EWZ, SPY.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.