JohnSpence

BOSTON (MarketWatch) — Investors who believe that China’s soaring stock market is due for crash now have a new tool to put their money where their mouth is.

Exchange-traded fund manager ProShares last week launched the first ETFs geared to short international-stock indexes, including a fund that seeks to deliver twice the inverse, or opposite, daily return of Chinese stocks.

UltraShort FTSE/Xinhua China 25 ProShare FXP, -0.98% which shorts Chinese stocks, is generating plenty of buzz.

With the FTSE/Xinhua China 25 Index appreciating by nearly 600% in the last five years, there is a great deal of talk of a potential for a ‘China bubble,’ said ProShares Chief Executive Michael Sapir.

The new ETF can be used by investors to protect a portfolio with China exposure from losses or to pursue gains from a falling Chinese market, he added.

Investors who sell stocks short are betting on a market decline since they stand to profit from lower prices, or they want to hedge an existing investment.

In the case of declines across developed international markets, the firm offers Short MSCI EAFE ProShare EFZ, +0.52% which is set up to provide daily returns equal to the inverse of the daily performance of the MSCI EAFE Index, a common yardstick for international developed market stocks, minus fees.

Meanwhile, a leveraged version, UltraShort MSCI EAFE ProShare EFU, +1.65% has an objective of delivering two times, or twice, the opposite return of the index. For example, if the MSCI EAFE lost 1% during the trading day, the ETF aims to produce a positive 2% return. If the index gains ground, the ETF should post a comparable loss.

ProShares also listed a pair of ETFs for shorting emerging markets stocks: Short MSCI Emerging Markets ProShare EUM, +1.32% and the leveraged UltraShort MSCI Emerging Markets ProShare EEV, +2.42%

In addition, the firm introduced a leveraged ETF specifically for shorting Japan’s market: UltraShort MSCI Japan ProShare EWV, -0.04%

Long run seen for short ETFs

ProShares, a unit of money manager ProFunds Group, has been busy in recent weeks building out its lineup of ETFs.

ProFunds is best known for its stable of leveraged and inverse index funds, but the Bethesda, Md.-based firm is a growing player in the booming ETF industry. However, its monopoly in leveraged and inverse ETFs recently came to an end with rival Rydex Investments getting into the business.

ETFs are baskets of securities that trade like individual stocks, so they can be sold short. However, the new ProShares ETFs are designed to automatically short indexes.

The leveraged and inverse ETFs use complex financial instruments such as derivatives to carry out their objective. Although they should do a decent job of delivering performance on a daily basis, investors should expect tracking error over the long term due to volatility and compounding. Also, the ETFs could see dramatic price swings because they employ leverage.

After about 16 months in the business, ProShares now offers 58 ETFs with more than $9 billion in total assets. The firm was the first to introduce leveraged and inverse ETFs, but Rydex is looking to provide some competition in the space.