With one day trading day already in the books, an ominous, but familiar theme is emerging this week: Europe roiling global markets and the corresponding ETFs being taken to the woodshed here in the U.S.
Shares of the iShares MSCI Italy Index Fund (NYSE:EWI) sank 5.7 percent on volume that was better than triple the daily average as Italian election results showed former Prime Minister Silvio Berlusconi's conservative party in position to take a majority in that country's senate.
Italy fears dragged the iShares MSCI Spain Index Fund (NYSE:EWI) lower by nearly 5.4 percent on almost quadruple the average daily turnover. None of this was good for the Global X FTSE Greece 20 ETF (NYSE:GREK), which plunge almost 8.1 percent on better than triple the usual volume.
Of course, the iShares MSCI U.K. Index Fund (NYSE:EWU) cannot be forgotten. That ETF lost 2.3 percent on heavy volume in the first full trading session after Moody's Investors Service stripped the U.K. of the prestigious AAA credit rating.
All of those factors have the ProShares UltraShort MSCI Europe (NYSE:EPV) set up for a very nice week. Emphasis on "week" given EPV's penchant for disappointment over long-term holding periods.
EPV gained nearly six percent on almost quadruple its average volume Monday and a look at what exactly the ETF does indicates more near-term upside could be on the way. For starters, EPV is designed to deliver twice the daily inverse performance of the MSCI Europe Index. That index is currently tracked by the popular Vanguard MSCI Europe ETF (NYSE:VGK).
Ultimately, the loss of the AAA rating may not be much of a hindrance to EWU, but for now it clearly is not helping matters. That is relevant to EPV because the MSCI Europe Index allocated almost 34 percent of its weight to the U.K. as of the end of January, according to MSCI data.
That is more than double the 14.64 weight France has in the index. Combine Germany and Switzerland and the result is still just 27 percent of index's weight, affirming the notion that weakness in the U.K. is bad for this index, which is good for EPV.
Additionally, EPV could be boosted by a classic perception/reality debate. The reality is Italy and Spain are not significant portions of the MSCI Europe Index's weight. The two countries combine for just 8.2 percent of VGK, according to Vanguard.
All told, the five PIIGS nations equal just nine percent of VGK's weight. In a more sanguine environment, that reality would matter. However, it is the perception that the MSCI Europe Index is heavy on the Eurozone's most troubled constituents that bodes well for EPV this week.
Again, EPV must be treated as a short-term trade, not a buy-and-hold investment. The one-year returns serve as a reminder. Before the start of trading Monday, VGK was up 7.14 percent in the past year. EPV was much worse than twice as bad as VGK over that time. Prior to Monday, EPV had plunged 31.4 percent over the past 12 months.
Those who do not enjoy the adrenaline rush of leveraged ETFs, but still want to profit from tumbling European stocks should consider the ProShares Short MSCI EAFE (NYSE:EFZ). EFZ is the unleveraged inverse equivalent of the iShares MSCI EAFE Index Fund (NYSE:EFA). Roughly two-thirds of EFA's weight is allocated to European nations. The U.K., France and Switzerland combine for 40 percent of EFA's weight.
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