The last month has been a wild one on Wall Street and on stock exchanges around the world. Europe’s fiscal woes have rippled throughout global equity markets, as concerns over the impact of a “euro drag” on global growth have intensified. The recent “flash crash” shook confidence in major exchanges, while plummeting commodity prices have hammered resource-intensive economies. While most assets have plunged, some have benefited from the turmoil. Gold and the U.S. dollar, two traditional safe havens, have both soared. Volatility futures, including the volatility ETNs from iPath have skyrocketed. And of course inverse equity ETFs have generally performed very well.
Leveraged ETFs have been the subject of significant criticisms and scrutiny over the last year (much of it unfair). But the last months serves as an excellent illustration of why these funds are so popular with investors. Many of those who either hedged their exposure or bet on a slide in equity markets have seen huge gains in recent weeks. Below, we highlight the three leveraged ETFs that finished Thursday up at least 50% since the S&P 500 hit its 2010 high on April 23. The S&P 500 SPDR (SPY) closed Thursday down about 11.7% during that period, officially moving it into “correction” territory.
Direxion Daily Emerging Markets Bear 3x Shares (EDZ): Up 53.2%
This ETF seeks to deliver daily gains equal to 300% of the inverse of the daily change in the MSCI Emerging Markets Index. Emerging markets have been crushed by a “double whammy” in recent weeks; a general decline in risk appetite sparked a sell-off while a rising dollar weakened commodity prices (thereby negatively impacting commodity-intensive emerging markets). EDZ’s 20 Day momentum is an impressive $20.46, illustrating the impressive run over the last month (see Understanding ETF Technical Analysis).
Direxion Daily Latin America 3x Bear Shares (LHB): Up 62.1%
Despite its insulation from the troubled euro zone, Latin America has been one of the biggest losers during the correction. LHB offers leveraged exposure to the S&P Latin America 40 Index, which is an equity index drawn from five major Latin American markets: Argentina, Brazil, Chile, Mexico and Peru. Many Latin American markets have been hurt by a stronger dollar which has crushed commodity prices, a main export of many South and Central American countries. In fact, the iShares MSCI Brazil Index Fund (EWZ) is down 18% over the past month, while the iShares MSCI Mexico Index Fund (EWW) has sunk by close to 14% as well (see LHB’s fundamentals).
Direxion Developed Markets Bear 3x Shares (DPK): Up 55.2%
DPK offers leveraged exposure to the MSCI EAFE Index, a free float-adjusted market capitalization weighted benchmark that is designed to measure developed market equity performance, excluding the U.S. and Canada. The index maintains significant exposure to the euro zone; component countries include Belgium, France, Germany, Greece, Ireland, Italy, and Spain. A short bet on Europe has been a profitable one in recent weeks; DPK has surged higher since late April (see DPK’s fact sheet for more information).
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Disclosure: Eric is long EWZ.