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Enjoy High Yield With These Low-Beta EM Local Currency Bond ETFs

Amid low yield all over the world, income-starved investors are presently in search of solid current income. After all, the Eurozone and Japan are now following a negative interest rate policy while rates at other developed economies are at rock-bottom levels. In the U.S., which tried to go against the flow by raising key rates after a decade last December, the confidence level weakened this year after a global market rout. Investors flocked to safe-haven assets like government bonds and dumped risky assets like equities. As a result, yields on the benchmark 10-year U.S. Treasury fell 50 bps to 1.74% on February 23, 20 16, from the start of the ye(ar. Yields on Japan’s benchmark 10-year government bond slid to below zero for the first time in early February and yields on the 10-year German bunds also slid to multi-month levels. In such a situation, investors’ craving for a steady current income is warranted. One space that offers solace is emerging market (EM) local currency bonds, which provide a solid yield. Fading hope of frequent Fed hikes this year should also bring some relief to emerging market securities. Local currency products are likely to gain this year because the U.S. dollar has been subdued, having lost about 1.5% in the year-to-date frame (as of February 22, 20 16). So investors can enjoy some gains from the emerging market currency appreciation. Also, emerging market currency bonds and the related ETFs provide investors greater protection to capital gains than EM equities. Plus, what can be a better bet if those bond ETFs have low beta that works as a solid bulwark against market volatility. Keeping this in mind, we highlight five local-currency denominated EM bond ETFs that have a negative beta and offer smart yields. Even if these bond ETFs fail to please investors by capital gains, hefty yields will be there to make up for the underperformance. Investors could make a fixed income play with local currency denominated bond ETFs in the near term. Market Vectors J.P. Morgan EM Local Currency Bond ETF (NYSEARCA: EMLC ) – Beta Negative 0.50 This fund provides direct exposure to local currency bonds issued by emerging market governments by tracking the J.P. Morgan GBI-EMG Core Index. It holds 203 securities in its basket with an average modified duration of 4.83 years and average years to maturity of 7.03. In terms of country exposure, Malaysia (8.63%), Poland (8.45%), Supranational (8. 19%) and Mexico (8.06%) occupy the top four spots. About 74% of the portfolio is focused on investment-grade bonds with BBB or higher ratings. EMLC is the largest and popular ETF in the local currency emerging bond space with an AUM of over $ 1 billion and average daily volume of 760,000 shares. It charges 47 bps in annual fees and has gained 1.7% so far this year (as of February 22, 20 16). Additionally, the product has an excellent dividend yield of 6. 18% per annum. PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA: PCY ) – Beta Negative 0.28 This 8 1-security ETF includes bonds issued by Mexico, Panama, Peru, Uruguay, Venezuela, Bulgaria, Russia, South Africa, Turkey, Brazil, Colombia, Indonesia, Korea, Philippines, Qatar, Argentina, El Salvador and Vietnam. The fund has an asset base of $2.57 billion and charges 50 bps in fees. The fund’s effective duration is 7.83 years while its years to maturity are 13. 14. Around half of the bonds are rated BBB or higher. The product yields 5.58% annually (as of February 22, 20 16) and has added 0. 1 1% so far this year (as of February 22, 20 16). SPDR Barclays Capital Emerging Markets Local Bond ETF (NYSEARCA: EBND ) – Beta Negative 0.52 This product tracks the Barclays Capital EM Local Currency Government Diversified Index, which is designed to measure the performance of fixed-rate local currency sovereign debt of the emerging market countries. In total, the fund holds 236 securities with an average maturity of 7.59 years and adjusted duration of 5.33 years. In terms of credit quality, it focuses on bonds having Baa or higher ratings with almost 60% weight. South Korea ( 12.2%) and Mexico ( 10.3%) take the top two spots. EBND has an AUM of $52.4 million and average daily volume of 30,000 shares. Expense ratio comes in at 0.50%. The fund is up over 2% in the year-to-date frame (as of February 22, 20 16) and has a 5.03% 30-day SEC yield. WisdomTree Emerging Market Local Debt ETF (NYSEARCA: ELD ) – Beta 0.54 This actively managed ETF does not track a specific benchmark, but seeks a high level of total return consisting of both income and capital appreciation. It currently holds 1 17 securities with average years to maturity of 7.75 and an effective duration of 4.92 years. Poland, Brazil and Mexico are the top three countries. About 82% of the bonds are rated BBB or higher. The fund has amassed $368.5 million in its asset base and charges 55 bps in fees per year. It trades in a good volume of more than 150,000 shares a day on average and has a good yield of 5.49% in annual dividend. The ETF has lost about 0.2% so far this year (as of February 22, 20 16). Market Vectors Emerging Markets Aggregate Bond ETF (NYSEARCA: EMAG ) – Beta Negative 0.60 The comprises sovereign bonds/corporate bonds denominated in U.S. dollars, euros or local emerging markets currencies and includes both investment-grade and below-investment-grade-rated securities. While the U.S. dollar takes about 57.7% of the fund, other currencies account for the rest. Effective duration is 4.80 years and years to maturity are 6.68. The fund has amassed about $ 14.2 million in assets and charges 49 bps in fees. Government bonds make up 55.2% of the fund’s portfolio while energy ( 12.2%) and financials ( 1 1.6%) round out the top three positions. Around 64% of the portfolio is investment grade in nature. EMAG yields 4.83% annually and is up 2% in the year-to-date frame (as of February 22, 20 16). Original post

Preserve Your Capital By Including Precious Metals In Portfolio

We are witnessing a horrible run in stock markets across the world. January was terrible, with all leading global indices ending in red territory. China’s benchmark Shanghai Stock Exchange slumped about 25%. The tumult has continued in February as virtually every sector, from biotech to energy and from banking to tech-has struggled. With stock markets getting hammered on daily basis, it will not be surprising to find majority of investors’ portfolios may have taken a big blow. Nouriel Roubini, noted American economist, in a recent interview ruled out that the global economy is in danger of confronting 2008 financial crisis-like situation. Nonetheless, there are not many good signs for a healthy global economy. The oil market is witnessing a carnage, emerging markets are in doldrums as a result of sliding commodity prices and capital flight, and China is slowing down. German economy, Europe’s growth engine, faltered significantly in December as industrial production lost momentum. The U.S. economy, by and large, is chugging along nicely but ambiguity over the Federal Reserve’s next round of interest rate hikes and anxiety over the run up to Presidential elections, should keep markets under tight leash. Against this backdrop, it is very likely that market participants will have a very low risk appetite. As a result, the market sentiment could remain bearish for most part of the year. Still, investors can safeguard their capital and minimize risks by including safe-haven assets such as precious metals ETFs in their portfolios. For instance, consider, Physical Precious Metal Basket Shares Trust ETF (NYSEARCA: GLTR ). The ETF, in the backdrop of the meltdown in precious metals markets as a result of stronger dollar, slumped about 20% in 2015. The situation, however, has changed dramatically this year. The ETF is up about 10%, year-to-date, performing almost on par with gold and silver and way better than other assets. The investment objective of this fund is that the shares should reflect the value of physical gold, silver, platinum and palladium in the proportions held by the trust. As of February, physical gold constitutes about 60% of the portfolio, silver accounts for about 28% of total assets, while platinum and palladium make roughly 12% of total assets. Barring palladium, which is still struggling, all other precious metals are expected to perform reasonably well this year. Gold, as I discussed earlier, stands to gain for many reasons. Firstly, the slump in oil prices amid supply glut would keep investors wary of riskier assets and create demand for safe-haven bets. Earlier this month, gold vaulted to a 7 ½ month high as investors moved their money towards safer assets. Besides, there is growing speculation that the pace of rate hike will much slower than previously anticipated. Lower interest rates would encourage investors to shift their money towards non-interest yielding assets such as precious metals. And finally, although, physical gold market has relatively low influence over prices than paper gold market, drop in mining activities, due to years of low-price environment, should also propel gold prices. Silver, meanwhile, should continue to march ahead, as the white metal, typically tends to have a positive price correlation with gold. Platinum performed badly last year. It sunk about 27%. However, it has begun the year strongly. Gaining about 4.75%, year-to-date, the metal should perform better this year as the demand from the automobile sector is likely to remain robust. Also, as I discussed earlier citing the World Investment Council report published in September, platinum mining activities in South Africa are expected to halt for next two years. This is because; an extended period of low-price environment has forced miners to drastically cut down CAPEX. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Time To Invest In Emerging Markets? 5 Mutual Fund Picks

Slowdown in the Chinese economy, wild swings in currencies and tumbling commodity prices are dragging emerging markets down. Brazil and Russia have already entered recession. Most of the investors fear that the financial crisis in emerging economies is a bigger issue than Eurozone concerns and a hike in interest rates in the U.S. Emerging markets witnessed capital outflows faster than ever in the fourth quarter of 2015. They are now facing a wide range of risks that might weigh on their sovereign, corporate and bank ratings. However, in the face of insurmountable odds, emerging countries have remained relatively resilient for the last couple of years. What protected them from a full-blown crisis was perhaps their beefed up foreign exchange reserves. Macroeconomic headwinds notwithstanding, emerging countries are also projected to grow at a steady rate in the near term. Moreover, fears that have resulted in selling, deleveraging and down-sizing emerging economies also now work in their favor. Bargain-hunting investors should look for investing in this oversold market. Hence, if an investor is willing to stay invested for the long term, then emerging market funds can be a good bet. Investors Pull Money from Emerging Markets Investors pulled $270 billion from emerging markets last quarter that surpassed withdrawals during the financial crisis of 2008. China led the outflows, with about $159 billion pulled out of its economy in December alone. Barring China’s outflows, the emerging markets could have witnessed inflows in the quarter, according to Capital Economics Ltd.’s economist William Jackson. Concerns about weakness in China’s currency led investors to dump riskier assets. Last year, China surprised investors by devaluing its currency, which eventually led to a rout of $5 trillion in the nation’s equity markets. Subsequently, China plunged into bear market territory last month, with its manufacturing activity contracting at the fastest pace in January since August 2012. Separately, according to the Institute of International Finance, investors pulled $735 billion from emerging economies in 2015, the first year of net outflows since 1988. Emerging Markets Risk Intensifies Higher interest rates in the U.S., a stronger dollar, declining commodity prices and a rise in geopolitical tension are adversely affecting credit ratings in emerging countries. Fitch Ratings downgraded Brazil’s and South Africa’s sovereign ratings in December. These macroeconomic headwinds are also negatively impacting emerging markets’ corporate and bank outlook. Meanwhile, private sector debt turned out to be a key challenge in emerging markets. Private sector debt has surged in emerging markets in the last 10 years. Seven large emerging nations including Brazil, India, Indonesia, Mexico, Russia, South Africa and Turkey witnessed a collective rise in their private sector debt to an estimated 77% of their GDP in 2014, significantly up from 46% in 2005, according to Fitch’s analysis. Is It All Over for Emerging Markets? On an individual basis, however, most of these emerging economies haven’t added much debt compared to the size of their economies. India’s and South Africa’s private debt-to-GDP ratio increased by 17 and 11 percentage points, respectively, according to Capital Economic Ltd. The private debt-to-GDP ratio for Malaysia and Indonesia also came in at 18.5 and 12.5 percentage points, respectively. Meanwhile, growth in emerging market economies slowed down to a pace of 3.7% in 2015, according to the World Bank. A year earlier, the pace was around 4.5%. However, the World Bank expects growth in emerging economies to rise by 4.2% this year followed by a steady increase of 4.8% and 4.9% in 2017 and 2018, respectively. Moreover, Russia’s GDP, which constitutes a major part of emerging market GDPs, is also positioned to contract less, eventually having a positive impact on the overall growth of the developing nations. Russia’s GDP of around $1.2 trillion is about 4% of emerging markets’ $28 trillion economy. According to Alberto Ades, head of global economic research at Bank of America Corporation (NYSE: BAC ), the pace of contraction in Russia’s GDP this year will slow down to 0.5% from last year’s contraction of 3.7%. In 2015, Russia was responsible for reducing about 15 basis points from overall emerging markets’ economic growth. This year, it is expected to shave only 2 basis points. Separately, Daniel Hewitt, a senior emerging-markets economist at Barclays PLC (NYSE: BCS ) said that emerging economies will expand at an average rate of 4.3% in 2016, higher than 4.1% last year. He believes easing of economic contractions in Russia along with Brazil and Venezuela will help emerging markets to grow in 2016. 5 Emerging Market Funds to Buy Emerging markets have shown remarkable resilience, banking on adequate foreign exchange reserves. For example, India accumulated reserves of $325 billion by 2014, while its reserves were merely $5.6 billion in 1990, according to the World Bank data. Indonesia and Thailand too piled up $112 billion and $157 billion, respectively, by the end of 2014. As many developing countries are in a much sounder shape than they appear, investors might have a look at emerging market mutual funds, keeping in mind a long-term view. These funds generally tend to do well over the long haul due to their higher risk content. However, they may stand out in the short term as well. Emerging market funds had tanked almost 50% during the global financial crisis in 2008, but quickly recovered, gaining more than 65% in 2009. Also, it will be prudent to invest in such emerging mutual funds that have less exposure to the beleaguered Chinese economy. We have shortlisted the top five emerging market funds. They have an impressive five-year annualized return, a minimum initial investment within $5000, low expense ratio and a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). T. Rowe Price Emerging Markets Bond Fund (MUTF: PREMX ) provides current income and capital appreciation. PREMX invests a large portion of its assets in government and corporate debt securities of emerging nations. PREMX’s 5-year annualized return is 3.5%. PREMX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.93% is lower than the category average of 1.16%. As of the last filing, Argentine Republic 7% was the top holding for PREMX. Fidelity New Markets Income Fund (MUTF: FNMIX ) invests the majority of its assets in debt securities of issuers in emerging markets and other investments that are tied economically to these markets. FNMIX’s 5-year annualized return is 4.7%. FNMIX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.84% is lower than the category average of 1.16%. As of the last filing, US Treasury Bond 3% was the top holding for FNMIX. JPMorgan Emerging Markets Debt Fund (MUTF: JEMRX ) seeks high total return and normally invests a large portion of its assets in emerging market debt investments. JEMRX’s 5-year annualized return is 4.4%. JEMRX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.77% is lower than the category average of 1.16%. As of the last filing, Argentina Rep 8.28% was the top holding for JEMRX. Fidelity Advisor Emerging Markets Income Fund (MUTF: FMKIX ) seeks capital appreciation. FMKIX invests a major portion of its assets in securities of issuers in emerging markets and other investments that are linked economically to these markets. FMKIX’s 5-year annualized return is 4.6%. FMKIX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.88% is lower than the category average of 1.16%. As of the last filing, US Treasury Bond 3% was the top holding for FMKIX. Franklin Emerging Market Debt Opportunities Fund (MUTF: FEMDX ) seeks high total return. FEMDX invests the majority of its assets in debt securities of “emerging market countries” that the World Bank considers to be on the developing curve. FEMDX’s 5-year annualized return is 2.3%. FEMDX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 1% is lower than the category average of 1.16%. As of the last filing, United Mexican States 4% was the top holding for FEMDX. Original Post