Betting on Emerging Markets While Sidestepping China’s Sinkhole
Editor’s note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of any holding time frame. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged and inverse ETFs are not for you.
If there’s one thing clear for traders in emerging markets, it’s that the performance of individual countries in this group can diverge a lot. Case in point: the benchmark MSCI Emerging Markets Index* fell 4.6% in January. But the China component fell over 10% for the month. Going back three months, the broader MSCI Emerging Market Index actually rose 7% while China fell 10.5%.
Chinese stocks have been a disaster since peaking in early 2021, and investor sentiment is in the dumps. In fact, China’s stock market sell-off has vaporized almost $2 trillion in value, the Financial Times reports.
There are times to be a bull in the China shop, but lately this has not been the case. Traders eager to add diversified emerging markets exposure to their portfolio thus have a China problem. The country’s equities typically comprise about a third of emerging markets indices.
Below is a daily chart of the MSCI Emerging Markets ex China Index* as of February 23, 2024. The Index staged a decent rally off its late January lows, but this may just be a classic dead cat bounce.
MSCI Emerging Markets ex China Index Value from August 2023 to February 2024
Source: www.msci.com, February 23, 2024.The Index was launched on December 31, 1969, with a starting value of 1,000.
The performance data quoted represents past performance. Past performance does not guarantee future results. An investment cannot be made directly into an index.
Traders are Fleeing for Greener Pastures
Traders are voting with their money, abandoning China for emerging markets judged to be more attractive—India being the most prominent. Investors poured record sums into Indian equity ETFs listed in the U.S., while pulling money from Chinese-focused funds. Large institutional investors are also making decisive bets, as Bloomberg noted in early February.
A New ETF for Emerging Market Bulls Who Are China Bears
Direxion recently introduced a new fund for traders who want leveraged long exposure to emerging markets without the potential China drag: Direxion Daily MSCI Emerging Markets ex China Bull 2X Shares (Ticker: XXCH). This leveraged ETF seeks daily investment results, before fees and expenses, of 200% of the performance of the MSCI Emerging Markets ex China Index*.
The index is designed to capture the large-and mid-capitalization* securities across 23 of the 24 emerging markets (with the exception of China) as defined by MSCI Inc. The Index is market cap weighted and covers approximately 85% of the free float-adjusted market capitalization in each of the selected countries. Top holdings include Taiwan Semiconductor (9.17%), Samsung Electronics (5.61%), and Reliance Industries (1.82%). At the end of 2023, information technology and financials comprised over 50% of the benchmark.
To see the Fund’s full holdings, click here. To see the Index Top 10 Holdings, click here. Holdings are subject to risk and change.
Upcoming Catalysts to Keep an Eye On
Traders bullish on emerging markets ex-China should pay attention to potentially important catalysts. These include:
- On March 4, South Korea reports its final gross domestic product (GDP)* growth number for the fourth quarter of 2023. With a preliminary reading of 0.6% quarter-over-quarter, a hotter print here will suggest the global economy is on sound footing—and China’s sluggish growth isn’t dragging South Korea down.
- On March 12, India will release data on industrial production growth in January. December saw a rise of 3.8%. A beat here should be music to the ears of emerging markets bulls, because Indian stocks account for just under a quarter of the MSCI Emerging Markets ex China Index.
- Don’t Forget the Fed: On March 19-20, the Federal Open Market committee meets again. Emerging market bulls will want to see some mention of potential rate cuts, as this might weigh on the U.S. dollar. Historically, a falling dollar is a tailwind for emerging markets stocks.
*Definitions and Index Descriptions
An investor should carefully consider the Fund’s investment objective, risks, charges, and expenses before investing. The Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain the Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. The Fund’s prospectus and summary prospectus should be read carefully before investing.
Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
The MSCI Emerging Market IndexSM (NDUEEGF) is a free float-adjusted market capitalization weighted index that is designed to represent the performance of large- and mid-capitalization securities across emerging markets countries.
The MSCI Emerging Markets ex China Index (M1CXBRV) is designed to capture the large- and mid-capitalization securities across 23 of the 24 emerging markets (with the exception of China) as defined by MSCI Inc. The Index is market cap weighted and covers approximately 85% of the free float-adjusted market capitalization in each of the selected countries.
One cannot invest directly in an Index.
The Fund described herein is indexed to an MSCI Index. The Fund or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities or any index on which funds or securities are based. The Prospectus contains a more detailed description of the limited relationship MSCI has with Rafferty and any related funds.
Securities from issuers in emerging markets face the potential for greater market volatility, lower trading volume, higher levels of inflation, political and economic instability, greater risk of market shutdown and more government limitations on foreign investments than typically found in more developed markets.
Direxion Shares Risks — An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund's concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Tax Risk, and risks specific to Emerging Markets and emerging markets countries. Investing in emerging markets instruments involves greater risk than investing in issuers located or operating in more developed markets. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
Distributor: Foreside Fund Services, LLC.