Emerging markets typically offer the greatest opportunities -- and the most risk. If you have tracked the markets closely in just the past week, you likely noticed sizable one-day swings up and down largely due to news of debt problems from Dubai last Thursday. On that day, emerging markets dropped sharply. However, emerging markets rebounded solidly this week when those debt problems seemed isolated, and less severe than first feared.
The past week has been a lesson in why emerging markets require you to accept a heightened measure of risk. It also shows that emerging markets can be profitable whether you trade them long or short, if you do so at the right times. With markets generally trending upward in recent months, taking long positions has made sense. If you ever truly know or expect that a crisis is about to unfold, buying a wisely chosen short position can be a good way to turn a quick profit.
Dubai's move last week to try to delay repaying the debt of its flagship company, Dubai World, scared investors and pushed the markets down. The markets rebounded yesterday when reports surfaced that the Dubai World debt problem only may total $26 billion, rather than the $60 billion initially reported last Thursday. Also yesterday, the Dow industrials rallied 127 points as worry eased generally about the Dubai World debt. The fallout further was limited when leadership of the United Arab Emirates tried to steady the nerves of investors with calming public statements.
I think the worst of this Dubai debt news is behind us. For Dubai itself, there is more than just the future of $26 billion of debt at stake. Although it is quite possible that other companies in Dubai may face similar financial pain, the fallout still unfolding in the Gulf nation likely will not create anything akin to a domino effect that knocks down emerging markets around the world.
For that reason, you may want to consider riding the rebound of emerging markets with a purchase of an exchange-traded fund (ETF) such as the ProShares Ultra MSCI Emerging Markets (EET). The following chart shows that the fund dipped late last week when the Dubai debt woes hit the headlines but now is rebounding.
If you want to wait for the next crisis to hit or if you anticipate one that you think you can time, the ProShares UltraShort MSCI Emerging Markets (EEV) might be worth buying just before, or just after, news is reported about the next financial calamity. If that crisis is short-lived, you will want to sell this fund quickly.
Please be cautious about taking any ultra or ultra-short positions, since they are designed to move double the direction of a non-leveraged ETF. EET is intended to move twice the direction of the daily performance of the MSCI Emerging Markets index, while EEV is created to correspond to twice the inverse performance of the same index.
If you believe stock markets still have room to rise, emerging markets provide the greatest chance for big profits in the short term. However, if you expect the current market rally to fizzle, emerging markets could be among those that pull back the most.
If you want my advice about which ETFs to buy and sell, I encourage you to check out my ETF Trader service by clicking here. Please keep in mind that I am pleased to answer questions about ETFs. To send me a question, simply click here. You may see your question featured in a future ETF Talk.