Playing The Emerging Markets Trade With Leveraged ETFs

The MSCI Emerging Markets Index is up more than 25 percent year-to-date, putting the widely-followed gauge of developing world equities on pace for its best annual performance since 2012. Investors are responding, making emerging markets exchange traded funds (ETFs) some of this year's top asset-gathering funds.

Risk-tolerant, tactical traders can take advantage of short-term emerging markets trends with leveraged ETFs, such as the Direxion Daily MSCI Emerging Markets Bull 3X Shares (NYSE:EDC). EDC is designed to deliver triple the daily returns of the MSCI Emerging Markets Index.

A bet on EDC, or any traditional diversified emerging markets ETF for that matter, is a heavy bet on Asia. The MSCI Emerging Markets Index allocates over 55 percent of its combined geographic weight to China, South Korea and Taiwan.

Price Action

Emerging markets had been lagging developed markets stocks for several years, a trend that showed signs of breaking last year as measured by the ratio of the MSCI Emerging Markets Index against the MSCI EAFE Index.

For years, the valuation levels for developed markets (MSCI EAFE Index) have been above historic levels as emerging markets (MSCI Emerging Markets Index)played catch up, said Direxion in a recent note. The price ratio shows emerging markets outperforming developed markets in 2016 and so far in 2017.

Despite that, traders seem bearish on the index. Over the past month, the ETF has averaged daily inflows of more than $32,000, according to Direxion data. However, EDC's bearish counterpart, the Direxion Daily MSCI Emerging Markets Bear 3X Shares (NYSEARCA:EDZ) has average inflows of more than $314,000 per day over that period.

Big Markets

The performances of EDC and EDZ on the bearish side, are largely determined by the largest emerging markets, such as China and India.

Much like the U.S, Chinas economy has been in a pattern of middling growth interspersed with brief spurts of productivity. In recent months, this trend has manifested in an upswing in Chinas manufacturing PMI by one to two points above the benchmark, said Direxion.

India, Asia's third-largest economy, is expected to post GDP growth of 7 percent this year, a rate that is expected to hold true for another eight years. Some traders are responding to those India expectations as the Direxion Daily MSCI India Bull 3X Shares (NYSEARCA:INDL), the only leveraged India ETF, has seen a sharp uptick in turnover in recent sessions.

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