by Robert Hsu | April 21, 2011 5:00 am
I just got back to the States from my latest trip to China, the fastest-growing major economy in the world. At a street level, it readily apparent just how much China is growing. The Beijing’s smog and traffic gridlock are even worse than before. I can see why the Chinese government wants to shift their development efforts to central China, which will have significant implications for investors.
Overall, though, I’m very upbeat regarding the new opportunities that I see on the horizon for investors, and I expect that we should see a continuation of the strong performance of China stocks. In the past three months, the Chinese A-Share market is up about 12.3%, compared to just a 3.9% gain in the S&P 500.
And it’s not just China — many other Asian emerging markets are also presenting some incredible opportunities right now for both short-term traders and long-term investors. But it’s important to sort the wheat from the chaff, so let’s discuss a few emerging markets that are currently sells.
The exchange-traded fund (ETF) industry is “carpet-bombing” various emerging markets with duplicate offerings by different ETF providers. Some of those are quite similar, but since ETF providers are after the fees generated and are not necessarily looking out for investors’ best interests, you have to pay attention. In general, I recommend that you go with the more liquid of two similar emerging market ETFs — especially if you are planning on trading in and out of a position — and it is incredibly important for investors to take a look under the hood and go through the underlying assets of an emerging market ETF.
While Egypt has a lot of potential as a North African economy with a developed infrastructure, the political situation makes the Market Vectors Egypt Index ETF (NYSE: EGPT) one to avoid.
This emerging market ETF originally traded at a huge premium to the prices of the underlying securities when the Egyptian stock market was closed, but since the market reopened, it has been on a steady decline.
This is because tourism is big in Egypt and this business is unlikely to return with continued unrest. With the military in charge, thing have quieted down, but there is still a civil war raging next door in Libya, and this is putting further pressure on the Egyptian economy.
I would avoid EGPT for the time being.
The oil-rich Middle East markets should be powering ahead with oil near $110 per barrel, but they saw quite a sell-off a month ago, and I am afraid that the recent recovery in the Market Vectors Gulf States Index ETF (NYSE: MES) and the WisdomTree Middle East Dividend Fund (NASDAQ: GULF) are opportunities to sell, despite my outlook for a continued surge in oil prices.
Saudi Arabia is far from stable with unrest on its borders, and the movement for democratic changes still threatens a spillover. The Saudi market was under significant pressure when protests originally erupted, and the situation in the region is not under control.
Leveraged Emerging Market ETFs Burn Buy-and-Hold Investors
Leveraged ETFs sounded like a great deal when they first came out. However, investors were very surprised to find out that if the underlying index had quite a few sell-offs and rallies, but essentially stayed in a trading range for a long period ending up unchanged, both the bullish and the bearish ETFs declined!
This is due to the mathematics of reverse compounding that add up over time, so the higher the leverage, the bigger the decline in both bullish and bearish ETFs.
This makes the Direxion Emerging Markets 3X Bear Shares (NYSE: EDZ) and the Direxion Emerging Markets 3X Bull Shares (NYSE: EDC) great for short-term trading, but terrible to hold over time in a range-bound market. The same goes for leveraged ETFs from ProShares, even though they carry 2X leverage.
If you want to buy and hold, go with the unleveraged ETFs, if you want to trade on a short-term basis, use the leveraged ones.
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