Understanding The Short Euro ETF Trade

With the sovereign and private bank debt situation in Europe showing no signs of reaching a resolution in the foreseeable future, many traders are looking for a short Euro ETF, which is an Exchange Traded Fund (ETF) that increases in value as the Euro currency or European financial assets decline in value.  There are a number of ways to trade the short Euro ETF trade, from buying ETFs that are based on the value of the Euro currency or European financial assets from the short side to shorting ETFs that derive their value from the Euro currency and European financial assets from the long side.  Either trade puts a trader into a short position to play the possible European financial meltdown.  However, since a short Euro ETF can include a variety of different financial assets and trading parameters, it is very important that traders understand what assets are included in the short Euro ETF position that they initiate and the nature of any short Euro ETF that one is considering purchasing.

Examples of Short Euro ETF Plays

The following is an example of a way to play a short Euro ETF by shorting an ETF that tracks the Euro currency:

• CurrencyShares Euro Trust (NYSE: FXE) is a Euro ETF that derives its valuation based on the performance of the Euro currency.  This liquid Euro ETF has an  average daily trading volume of approximately one million shares, which provides plenty of liquidity to initiate a short Euro currency position (which makes it trade like a short Euro ETF) and cover when the time is right to buy back the short position.

The following is an example of a short Euro ETF that shorts the Euro currency with two times leverage:

• ProShares Ultra Short Euro (NYSE: EUO) is a leveraged short Euro ETF that uses financial instruments to inversely track the Euro currency at two times its daily price movement versus the United States Dollar.  If the Euro currency is down 1% on a given trading day, EUO should be up 2%.

The following is an example of a way to play a short Euro ETF by shorting an ETF that tracks the Euro stock prices:

• ProShares UltraShort MSCI Europe (NYSE: EPV) is a leveraged short Euro ETF that uses financial instruments to inversely track the MSCI Europe Index, which is a broad European stock tracking index, at two times its daily price movement.

A word of caution, a leveraged short Euro ETF, such as EUO or EPV, does not always trade with the leverage one expects due to the sometimes unpredictable nature of the financial instruments used to attempt an exaggerated move.  Additionally, any sharp move higher in the Euro currency or European stock markets could cause a steep financial loss for anyone long a short Euro ETF, such as EUO or EPV, and therefore trading precautions, such as stop losses, should be used when trading these types of short Euro ETFs.

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