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Emerging Market Currency Bond ETFs: Safe Haven/Risky Bet?

The global market rout is nearing its peak and the U.S. treasury bonds are drawing attention with investors seeking refuge to safe havens. However, this strategy earns investors safety in their portfolio but deprives them of high yields. Previously, emerging market currency bonds and the related ETFs were shelters for investors seeking juicy yields as well as relatively higher protection to capital gains. But they seem to have lost their appeal now. There are a plenty of reasons that are pushing this investing arena out of favor. Below we highlight what’s spoiling the fervor in emerging market currency bond ETF investing and marring its safe haven appeal. Why A Risky Bet Now? Stronger Dollar : First of all, several emerging market currencies have been facing tough times in recent months and stacking up losses due to a still strong U.S. dollar. WisdomTree Emerging Currency Strategy ETF (NYSEARCA: CEW ), which measures changes in the value of emerging market currencies relative to the U.S. dollar, is down over 10% this year and lost 8.8% in the last three months (as of September 9, 2015). The speculation for the Fed lift-off has never been as strong as it is this time around. Though U.S. job numbers in August grew at the most sluggish pace in 5 months and fell short of analysts’ expectation, this might not deter the Fed from finally hiking the rate. This has made the greenback a king of currency that has weighed heavily on a basket of emerging market currencies, be it across Asia, or Latin America. Slumping Commodities : Many emerging market nations are commodity-rich. As a result, a broader commodity market swoon on supply glut, lower demand on global growth worries and a strong greenback wreaked havoc on currencies of commodity-focused economies including Russia, Brazil and Columbia. This was truer given the oil price crash over more than the last one-year period which has wreaked havoc on oil-oriented emerging economies like Russia and Columbia. This also dealt a blow to the emerging market currencies. China-Induced Global Market Rout : Upheaval in the Chinese economy and the stock market crushed the global market in August and it is still not out of woods. This episode sent shockwaves to other emerging markets, making the economic health of the entire EM bloc questionable. Impact on Emerging Market Currencies As a result, global emerging market bonds were hit hard at the last week of August and saw the highest exodus in assets (worth about $4.2 billion ) since the taper threat in 2013. Several analysts like Societe Generale ( OTCPK:SCGLF ) are against the emerging market currency bonds and believe that even if the Fed holds up the lift-off at the current level keeping the global market turmoil in mind, sheer ambiguity in policy decision will likely keep the outlook of the emerging market currencies downbeat. In short, underperformance in currency has marred the appeal for higher yields in emerging market bond ETFs. The recent price performance also bore testimony to this fact. Fundamental Emerging Markets Local Debt Portfolio (NYSEARCA: PFEM ) was the weakest performer in the emerging market debt ETF pack while the U.S.-dollar denominated ETFs like Emerging Markets Sovereign Debt Portfolio (NYSEARCA: PCY ) performed relatively better. U.S. dollar-denominated bond ETFs invest in sovereign debt from various emerging nations, but do so via U.S. dollar-denominated securities and are thus not hurt by currency translation troubles. Some of the worst-performing emerging market currency bond ETFs in recent times are Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA: EMLC ), WisdomTree Emerging Markets Local Debt Fund (NYSEARCA: ELD ), iShares Emerging Markets Local Currency Bond ETF (NYSEARCA: LEMB ) and SPDR Barclays Capital Emerging Market Local Bond ETF (NYSEARCA: EBND ). These ETFs shed the most in the last one-month frame, having lost in 5% to 7% range while retreated about 2% in the last five trading sessions (as of September 9, 2015). So, we can conclude from the recent trend that emerging market currency bond ETFs are hardly safe with attractive yields. Instead, these are rather unsafe with melting gains. Original Post

Are Treasuries The Best Safe Haven ETFs Now?

Though the U.S. economy has been putting up a stronger show since the second quarter of 2015, global growth worries led mainly by China issues could derail the U.S. market momentum in the coming days. Whatever the case, devaluation of the Chinese currency yuan by 2% and a six-and-a-half-year low manufacturing data for August left the global market in ruins last month. Apart from China, a slowdown in the Japanese economy, the return of growth concerns in the Euro zone, technical recession in Canada mainly on a protracted oil price rout, slouching commodities and painful trading in the emerging markets recently put an end to the rally in risky assets. If this was not enough, U.S. job numbers in August grew at the most sluggish pace in five months and fell short of analysts’ expectations. Though the data was not at all unimpressive as the unemployment rate ticked down to 5.1% from 5.2%, the lowest since April 2008, the estimate miss stirred up confusion among investors. This coupled with growing concerns in the global horizon sent investors on a defensive mode and brightened the risk-off trade sentiments. Investors dumped stocks and junk bonds in favor of safe haven assets to protect their portfolio from capital erosion. However, investors should note that there are a few assets in the market which are known for their safe haven bids. These include U.S. Treasuries, the greenback, gold and Japanese yen. These products normally gain when volatility in the market flares up and vice versa. However, all safe haven assets and the related ETFs did not provide equal solace to investors this time around. While some lived up to expectations and some failed short. Greenback – Loser U.S. dollar seems to be loser on this front. PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) which offers exposure to the U.S. dollar against a basket of six world currencies like the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc lost about 1.9% (as of September 4, 2015) in the last one month as the bet for the September timeline of the Fed lift-off had softened a bit since subdued inflation pushed the speculative timeline to a little later. After the latest U.S. job report which emphasized the estimate miss, UUP lost about 0.12% on September 4 and left safety seeking investors stranded. Gold – Gainer; But How Long? Though the looming Fed lift-off and the persistent slowdown in China (one of the major consumers of gold) go directly against the demand for the yellow metal, this precious metal offered unanticipated support to investors in the recent global market tumult. Gold bullion ETF SPDR Gold Shares (NYSEARCA: GLD ) added over 3.4% in the last one month. However, this support is likely to be short-lived as the underlying fundamentals are weak. Sooner or later, the U.S. economy is due for a rate hike which will tarnish the gold bullion. U.S. Treasury – Are the Best among the Pack? For the U.S. Treasury bonds, especially the long-dated ones, 2014 turned out to be a banner year. Though the looming Fed lift-off is a negative for U.S. treasury ETFs, 10-year U.S. Treasuries outdid their Group of Seven counterparts in the last month’s equities collapse, as per Bloomberg . Bloomberg also reported that the latest performance was a sweet surprise for Treasuries if we go by the prior three Fed rate-hiking rounds since 1993, when 10-year U.S. debt underperformed other developed countries. Yields on the U.S. benchmark 10-year notes, which touched the 2.50% mark – the highest point of this year – on June 10, slipped to 2.13% on September 4, 2015. The plunge in yields at the eleventh hour of the most speculated Fed meeting for a lift-off in mid-September favored its safe-haven standing. A still-low inflation level and an estimate miss in U.S. job data also spurred many investors to bet against an immense rate hike and pour their money into U.S. Treasuries, the safest harbor for smart yields and decent capital gains. Over the last one month (as of September 4, 2015), Barclays iPath US Treasury 5-Year Bull ETN (NASDAQ: DFVL ) added over 3.2%, the best performance in the government-backed bond ETFs space. The product looks to gain in response to a decrease in 5-year Treasury note yields and fall if there is a rise in 5-year Treasury note yields. Other well-performing treasury ETFs are Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ), Pimco 7-15 Year U.S. Treasury Index Fund (NYSEARCA: TENZ ), Intermediate-Term U.S. Treasury ET F (NYSEARCA: SCHR ) and iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ). Original Post

SPY’s Volume Speaks Volumes

I do not claim to be an avid student of market volume, and most market technicians would refrain from calling me an expert on the subject. However, I have enough knowledge on the matter to notice a few things once in a while. With this disclosure out of the way, I will now tell you what I have been observing. There are myriad volume measurements and statistics. There is the NYSE volume, NASDAQ volume, and let’s not forget BATS volume. For those of you not familiar with BATS, it is the third largest U.S. exchange. BATS captured a 22.0% market share of all U.S. equity trades in the month of August, so it is a name you should become familiar with. There are also statistics on up volume, down volume, and unchanged volume for each exchange. Many traders rely on volume indicators such as “on-balance volume” to guide their trading. Today, I want to focus on the volume of a single security – the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). It is the most heavily traded equity on the planet. It is just one of the more than 1,760 ETFs that are listed for trading in the U.S., yet it captured 35.2% of all ETF dollar volume in August. SPY trading averaged $35 billion per day last month, more than seven times the daily amount of the PowerShares QQQ Trust ETF (NASDAQ: QQQ ), the second most traded equity security. Meanwhile, Apple (NASDAQ: AAPL ), the most actively traded stock by dollar volume, averaged just $8.6 billion per day. Given the importance of SPY as a security, the importance of its volume is elevated, in my opinion. Earlier this week, many financial commentators were attempting to ascribe enormous bullish action to Tuesday’s +2.5% surge in the S&P 500 index, accompanied by an 11.6% bump in NYSE volume and a 12.1% rise in NASDAQ volume. However, I saw something different. The volume of SPY did not increase. It went the other direction and did so in an unambiguous way. The volume of SPY declined more than 43% versus the previous day. Additionally, that 2.5% rise in price came on the lowest volume in the past fourteen trading days. Not since August 18, before the market went into its recent tailspin, has SPY traded on lower volume than it did on Tuesday. Given the fact that most of the recent down days for SPY have occurred on increasing volume while up days have seen declining volume, I’m not ready to get bullish on SPY just yet. Additionally, since I believe SPY is one of the most important securities, I’m going to remain cautious on the overall market for the time being. Disclosure covering writer: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.