With interest rates poised to rise in the United States, emerging-market investments should be under great pressure. That they are not is a reminder that investors remain infatuated with any asset that offers the specter of faster growth, and also that a risk exists in the emerging markets that could benefit from some better definition.
Rather than selling emerging-market securities, which is what some have done in anticipation of higher U.S. rates, investors can consider buying calls, on the iShares MSCI Emerging Markets ETF (ticker: EEM).
Investors who already own EEM can consider selling the exchange-traded fund and replacing the position with EEM call options that expire in one year.
We will go so far as to say that buying calls on a hot investment is tantamount to expressing a value investor’s sensibilities while acting as a growth investor. Some will feel that statement pushes the boundaries of good analysis, but the risk management aspect in options is as worthwhile, as finding a good stock for less than it is worth.
The use of options, rather than just relying on the ETF instantly defines the investment’s risk by limiting exposure to the…