Bet Against Europe and Emerging Markets

 | Aug 07, 2011 | 2:52 PM EDT  | Comments
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Stock quotes in this article:

EPV

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EUM

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EEV

Although attention is on U.S. stock and bond markets after the S&P downgrade of U.S. debt Friday, it's worth thinking about how you can profit from the recent turmoil in global stock markets as well.

When the U.S. ruled the global economic roost, the conventional wisdom was that "when the U.S. sneezes, the rest of the world catches a cold."

Well, with both U.S. GDP and stock market capitalization as a percentage of global GDP sliding precipitously over the past decade, you'd think this was less true today.

Last week, overseas commentators could scarcely veil their glee when they reported Russia's Vladimir Putin comments that the U.S. "is living like a parasite off the global economy."

Parasite or not, your pension fund is unlikely to be moving your retirement assets to Moscow anytime soon.

The truth is that when risk is back on, investors flock to New York, not Rio, Moscow, Shanghai or Mumbai.

You saw this during the meltdown of 2008, when the U.S. stock market held up better than almost any other global stock market.

That's because global stock markets, as a rule, tend to be more volatile than their U.S. counterparts. You can make more money, more quickly by betting on a sharp drop in global markets than you can by betting on a decline in the S&P 500.

There are two basic ways you can bet against global stock-markets. First, you can short selected global stocks or their ADRs (American Depository Receipts) listed on U.S. exchanges. Second, you can buy one of a handful of ETFs that short selected global stock market indexes more directly.

The easiest way to bet against Europe is by buying the ProShares UltraShort MSCI Europe (EPV).

Sure, Europe now has a handful of countries whose credit ratings are higher than that of the U.S., including the United Kingdom, France, and Germany. In fact, the U.S. AA+ rating places it right alongside economic powerhouses like Belgium.

But Europe has got plenty of problems its periphery -- with the "PIIGS" countries- Portugal, Ireland, Italy, Greece and Spain -- all putting pressure on the euro and the economies of the entire eurozone.

Hardly a day passes without the announcement of a new and improved bailout package for Greece. And worries about larger economies like Italy and Spain are scarcely abating.

EPV is a leveraged ETF that seeks daily investment results that correspond to twice (200%) the inverse of the daily performance of the MSCI Europe Index. The index is made up of common stocks of companies located in 16 European countries, and includes holdings in each of the infamous PIIGS countries.

This leveraged bet against the eurozone economies is up an eye-popping 26.37% over the last month, and is now trading well above its 50-day moving average.

For all the talk about how emerging markets are set to dominate the global economy's future, this volatile asset class is almost always the first one to fall out of bed once markets revert back to "risk-on" mode.

That's par for the course. Last year, the MSCI Emerging Markets Index endured two stomach-churning corrections, falling 13.96% in February, recovering to new highs, and then dropping another 16.26% in May.

The best way to profit from these short-term moves is through the Short MSCI Emerging Markets (EUM). This ETF is the inverse of the MCSI Emerging Market Index.

This position is up 10.17% over the last month, and is trading above its 50-day moving average.

 If you really want to push the pedal to the metal on a bet against emerging markets, there is a double-leveraged bet against the MSCI Emerging Markets Index, the Ultrashort MSCI Emerging Markets (EEV). It is up 25% over the past month.

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