Egregious Offense: Traders Miss Out On The Right Emerging Markets ETF

Finding the right emerging markets exchange traded fund these days is no easy task. What qualifies as good among emerging markets these days could be the fund that is not performing as badly as its peers or the one that is not losing as much money as rivals.

Anecdotes pertaining to emerging markets outflows are staggering. For example, third-quarter outflows from developing world stocks were the first since 2009 and the worst since 2008. As for ETFs, the Vanguard FTSE Emerging Markets ETF (NYSE:VWO) and the iShares MSCI Emerging Markets ETF (NYSE:EEM), the two largest emerging markets ETFs by assets, shed $3.6 billion and $2.9 billion in the third quarter on their way to posting an average loss of 18.1 percent. EEM's outflows were second only to VWO and nearly two and a half times more than the third-worst ETF in terms of third-quarter outflows.

From Beijing to Moscow to Sao Paulo, emerging markets and ETFs look like a hall of shame as an array of single-country emerging markets have been afflicted by the same outflows virus as the diversified EEM and VWO.

Tumbling developing world stocks are opening the door to some compelling opportunities for risk-tolerant, short-term traders with bearish leveraged emerging markets ETFs. Whether or not those traders are taking advantage of those opportunities is a different story.

The Direxion Emerging Markets Bear 3X Shares (NYSE:EDZ), which attempts to deliver three times the daily inverse performance of the widely followed MSCI Emerging Markets Index, should be in style right now. As in cover of GQ and Vogue type of style. Instead, traders' treatment of EDZ borders on a fashionista's treatment of someone wearing white pants after Labor Day.

In the third quarter, traders added just $35.5 million to EDZ, indicating plenty of traders have missed out on the ETF's better than 55 percent surge over the past 90 days. One way of looking at that scenario is that for every dollar pulled from EEM and VWO, mere pennies trickled into EDZ even though emerging markets ETFs long ago revealed themselves to be damaged goods.

As is so frequently seen with leveraged ETFs, traders' bullish biases are getting in the way. That would explain the nearly $65 million that flowed into EDZ's bullish counterpart, the Direxion Emerging Markets Bull 3X Shares (NYSE:EDC), during the third quarter even as that ETF lost almost 46 percent.

A similar scenario is at work with the ProShares UltraShort MSCI Brazil ETF (NYSE:BZQ) and the Direxion Daily Brazil Bull 3x Shares (NYSE:BRZU) even though BZQ has proven to be the only Brazil ETF worth embracing from the long side.

There are some signs traders are finally warming to EDZ, albeit slowly. Over the past month, the ETF's average daily creation and redemption activity is positive, meaning creations outpace redemptions, and over the past five days, the ETF's volume has been 6 percent above the trailing 20-day average, according to Direxion data.