Short-Selling ETFs Make a Killing in Emerging Markets 

(Bloomberg) -- It's the investing world's equivalent of “MacKenna's Gold”: death is probable, but if you survive, the reward is unimaginable wealth.

As emerging-market stocks extend a $3.8 trillion rout, exchange-traded funds that short-sell them -- sometimes borrowing money on top of their investors' capital -- are making annualized returns of as much as 190 percent, according to data compiled by Bloomberg. That contrasts with long-only ETFs that have lost about 18 percent, or an annualized 35 percent, since the slump began in late January.

The best performer in this pack is the Direxion Emerging Markets Bear 3X Shares ETF that seeks daily returns of 300 percent in the opposite direction to the move in the MSCI Emerging Markets Index. It aims to achieve the results by taking both leveraged and unleveraged exposure to the equity gauge.

The ProShares UltraShort ETF seeks to make 200 percent inverse returns related to the benchmark gauge, while the more conservative ProShares Short MSCI Emerging Markets ETF satisfies itself with advancing 1 percent for every percent lost by the index.

The gains are drawing more short traders to bet against developing-nation stocks. Short interest in the iShares MSCI Emerging Markets ETF has jumped to $4 billion, the highest amount wagered on further equity declines since April 2014, according to IHS Markit data.

The message from ETF investors is that they like shorting emerging-market stocks now, though they are uneasy about leveraging to do so. The 2X and 3X bear funds haven't received inflows in the past two weeks, though the ProShares fund that moves opposite to stocks without trying to multiply returns has received five successive weeks of inflows.

The short-selling ETFs lost between 28 percent and 64 percent during 2017, when the MSCI gauge advanced 34 percent.

To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand

©2018 Bloomberg L.P.