What is EET? (Pros, Cons, and Strategies)

In the realm of investment, particularly for those targeting growth in emerging markets, ProShares Ultra MSCI Emerging Markets (EET) has garnered attention for its aggressive approach. EET is designed to deliver results that correspond to twice (200%) the daily performance of the MSCI Emerging Markets Index. While it may promise significant returns due to leveraged exposure, it also comes with higher risks. Let's dive deeper into what EET is, along with its advantages, disadvantages, and investment strategies.

What is EET?

EET, or ProShares Ultra MSCI Emerging Markets, is a leveraged ETF that seeks to deliver twice the daily performance of the MSCI Emerging Markets Index. This ETF aims to capitalize on the growth potential in emerging markets, but it does so with a high-risk, high-reward approach by using leverage.

Key Features of EET

• Leverage: EET aims for twice the daily performance of the MSCI Emerging Markets Index.
• Exposure: It provides substantial exposure to emerging markets, including countries like China, India, and Brazil.
• Volatility: As a leveraged ETF, EET is significantly more volatile than traditional ETFs or mutual funds targeting emerging markets.

Despite its potential for high returns, EET involves a high degree of risk, and it is more suited for experienced investors who understand the nuances of leverage and market fluctuations.

EET Composition

EET features a diversified portfolio of emerging market stocks, spanning various industries such as technology, finance, and consumer products, among others. Its top holdings often include large, well-known companies in these sectors. However, the leveraged exposure means that its performance can deviate substantially from the unleveraged version of the MSCI Emerging Markets Index.

Pros of EET

Potential for High Returns

EET's primary advantage is its potential for high returns, driven by its 2x leverage. If the underlying MSCI Emerging Markets Index performs well, EET could deliver substantially higher gains compared to non-leveraged ETFs.

For example, if the MSCI Emerging Markets Index rises by 5% in a day, EET aims to generate a 10% return, offering a powerful tool for investors who can manage the associated risks.

Diversification in Emerging Markets

EET provides comprehensive exposure to a wide range of emerging market economies, offering a diversified investment in multiple high-growth regions. This diversification can help mitigate country-specific risks, although the leverage still introduces substantial volatility.

Strategic Tool for Active Management

Experienced traders can use EET as an effective tool for short-term speculation and tactical portfolio adjustments. Its leveraged nature suits those looking to maximize short-term market movements in emerging markets.

Cons of EET

High Volatility and Risk

The most notable downside of EET is its high volatility due to leverage. While leverage doubles potential gains, it also doubles potential losses. If the MSCI Emerging Markets Index falls by 5%, EET would likely drop by about 10%, making it unsuitable for risk-averse investors.

Not Suitable for Long-term Holding

EET is designed to deliver about twice the daily performance of the underlying index, not long-term performance. Over extended periods, due to the compounding effect, the return of the ETF can deviate from twice the cumulative return of the index. This phenomenon, known as "volatility decay," makes EET unsuitable for long-term investors.

Expense Ratio

Leveraged ETFs like EET typically have higher expense ratios compared to non-leveraged ETFs. EET's expense ratio is higher, which can erode returns over time if the ETF is held for the long term.

EET Investment Strategies

Given its leveraged nature, EET is best used strategically rather than as a core long-term holding. Here are some approaches to consider:

Short-term Trading Strategy

EET is ideally suited for short-term trading. Investors looking to capitalize on daily or short-term market movements in emerging markets can benefit from its 2x leverage, given they can closely monitor their investments and manage risks effectively.

Tactical Portfolio Positioning

Experienced investors may use EET for tactical positioning within a broader, diversified portfolio. For example, if one anticipates a short-term rally in emerging markets, they could increase their exposure using EET and then quickly adjust the position as market conditions change.

Hedging Strategy

Some sophisticated investors might use EET to hedge other investments by offsetting potential losses in other parts of their portfolio. This approach requires a deep understanding of market dynamics and the specific characteristics of leveraged ETFs.

EET's daily resetting feature means that managing the position becomes crucial, and frequent adjustments might be necessary to maintain the desired exposure.

Conclusion

EET offers a unique tool for investors seeking amplified exposure to emerging markets through leverage. While it holds the promise of high returns, it also introduces significant risks, particularly due to its leveraged nature. EET is best suited for experienced investors and traders with a clear understanding of leverage and the ability to actively manage their positions. Long-term investors might find other emerging market ETFs more suitable due to lower risk and expense ratios. As with any investment, thorough research and a clear investment strategy are paramount when considering EET.