To say the least, the world economy has had a bumpy ride since the onslaught of the unprecedented financial crisis that rocked the world in 2008. Despite several glimmers of hope in the U.S.’s ability to bounce back, Euro Zone drama continues to take center stage as their seemingly never-ending and rather cyclical debt crisis continues to fester. It is no surprise that with the rather grim economic outlook for Europe, there is no shortage of bearish sentiment among investors surrounding European markets [see also Five ETFs For A China Bank Bubble].
While the U.S. continues to post relatively positive economic data, Euro Zone’s forecasts have been less than encouraging. Cash-strapped governments across the continent have been fighting tooth and nail to stave off a wave of sovereign defaults, and yet, investors continue to speculate on Europe’s ability to fully recover from their crisis. To make matters worse, several countries have plummeted into yet another recessionary period, leading many experts to believe that the end is perhaps not as near in our futures as was expected. Taking a look at the chart of iShares’ MSCI Spain Index Fund provides some proof of the Euro Zone’s shaky economic foundation: EWP has fallen 18.9% year-to-date.
But of course for those sophisticated investors who can stomach the risk, a Euro Zone double dip could create some attractive and lucrative opportunities. Below we highlight three ETFs that may appeal to investors betting against the continent’s rebound. It is important to note that these funds are both inverse and leveraged, and require regular monitoring as they reset on a daily basis [see also Short ETFs: Everything You Need To Know].
UltraShort MSCI Europe ETF (EPV)
This ETF is a powerful tool for sophisticated investors who are bearish on the short-term prospects of the developed European economy. EPV offers -2x leveraged exposure to the equity markets of several Western European countries, including the United Kingdom, France, Germany, Switzerland, Sweden, Spain, and Italy. EPV should by no means be found in a traditional long-term, buy-and-hold portfolio; however, it can be used effectively as a short term hedge or for speculating on a decline in the value of Euro Zone equities. Furthermore, it is important to note that the daily reset feature combined with the explicit leverage in this ETF make it imperative for investors to monitor this position on a daily basis.
UltraShort Euro ETF (EUO)
ProShares’s EUO is designed for risk-tolerant and highly experienced investors who are essentially looking to bet against the performance of the euro relative to the U.S. dollar or to hedge against existing euro exposure. The fund achieves this objective by seeking to deliver daily investment results equal to 200% of the inverse of the U.S. dollar price of the euro. Given its targeted focus and use of leverage, EUO is appropriate only for those investors with the willingness and ability to monitor and rebalance their portfolio regularly.
For those cost-conscious investors, the Market Vectors Double Short Euro ETN (DRR) may be a more appealing option. This fund offers generally similar exposure, but is 30 basis points cheaper than EUO with its expense ratio of 0.65%. It should be noted that DRR is an exchange-traded note, meaning that investors are exposed to the credit risk of the issuing institution [ETFdb Pro members can see the Ex-Europe ETFdb Portfolio ].
Daily Developed Markets Bear 3x Shares (DPK)
This ETF is designed for investors with a bearish short-term view of developed markets from the European, Far East, and Australian regions. The fund offers 3x daily short leverage to the MSCI EAFE Index, which seeks to measure the market equity performance of over 30 different developed EAFE economies. Although DPK is not the most direct approach investors can take, it does offer significant exposure to several Euro Zone countries, including Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy and Spain.
A non-leveraged option similar to DPK is the ProShares Short MSCI EAFE ETF, EFZ, which offers inverse exposure to securities from the EAFE region. With both of these products, however, it is important for investors to monitor their positions daily.
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Disclosure: No positions at time of writing.