Watching a New Name
The recent concerns over sovereign debt in Greece and other smaller European nations have put pressure on the euro and caused the European bourses to sell off harder than the U.S. markets. Although the severity of the correction is in line with what these markets experienced in June, it has occurred after a period of consolidation, making the reversal more pronounced from a relative standpoint. The result is that short funds are gaining top momentum spots for the first time since March 2009. Based on this action, I am adding ProShares Short MSCI EAFE (EFZ:NYSE) to the International Component of my Watch List.
ProShares short ETFs are designed to go up when the indices that underlie the benchmarks go down (and vice versa). These are more complicated ETFs that allow investors to seek profit from market downturns or to hedge their investments. Yet the securities come with all the ease and low expenses of ETFs -- according to ProShares, EFZ charges a gross expense ratio of 1.15%.
The underlying index aims to include 85% of the free-float- adjusted market cap for each major industry group in developed markets, excluding the U.S. and Canada. This makes the ETF highly correlated with markets in the U.K, Japan and Europe.
EFZ uses derivative contracts called swaps to get the inverse return of the MSCI EAFE. Essentially, swaps are contractual agreements for an exchange of returns between two financial institutions. Therefore, to bet against the index, the fund enters a swap agreement with a counterparty -- usually an investment bank or hedge fund -- that agrees to pay it 1% for every 1% the MSCI EAFE falls. On the flip side, the money manager would pay 1% for every 1% rise.
Such swaps make up the overwhelming majority of assets in the EFZ portfolio, but the fund could use any number of complicated derivative instruments, such as exchange-listed futures, options on futures contracts, forward agreements and listed options on individual securities. Assets not currently invested in derivatives or securities are frequently invested in short-term debt and/or money market instruments.
Although I am expecting the situation in Europe to get resolved without a Lehman-style crisis or panic, there may still be opportunities to hedge my portfolio and my international exposure with funds such as EFZ.
Regards,
Don Dion
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| Dow Jones | S&P 500 | NASDAQ | 10-Year Note | |
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| 9,984.04 | 1,061.25 | 2,134.36 | 36.25 |
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