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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

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

RSX: My Prediction For 2016

The next year is around the corner, and it’s high time to look at RSX prior to the Russian holidays. Oil stays low and poses a major threat to the economy. At current oil price levels, RSX is overvalued. Those who follow the Market Vectors Russia ETF (NYSE: RSX ) closely probably know that I’ve been bearish on Russia the whole year. Lately, I’ve been commenting on the tensions between Russia and Turkey , the impact of the continuing oil price decline on the Russian economy and the exchange rate of the Russian ruble. As the year ends, it’s logical to make a prediction for 2016 and leave the topic to develop until the end of January. Why the end of January? First and foremost, the Russian Central Bank will announce its key interest rate on January 29, 2016. In its next meeting, the Central Bank won’t have the luxury of waiting and will have to either support the economy by cutting the 11% rate or choose the course of supporting the ruble and leave the rate or even increase it. I think that this will be the pivotal moment. Also, keep in mind that Russia has long New Year holidays that last from January 1 up to January 10. In practice, low volume trading and muted business life typically last from the last week of December up to the “Old New Year” on January 14. To those interested, the “Old New Year” date is the New Year date in Julian calendar, which was observed in Russia until 1918, when Gregorian calendar was implemented. Expect increased volatility and false moves during this period. It is clear that the main determinant for both the Russian market and the Russian economy is the oil price. If you believe that oil will go to $70 – $80 per barrel in 2016, then you should clearly buy RSX or other Russian ETF. I am in the bearish camp for oil, at least for 2016. My base-case scenario for Brent oil is $40 at best, and I think that oil will first go lower and could rebound only at the end of 2016. My main point is that if oil stays at current levels, the Russian market is significantly overvalued and will drift lower. Here’s why. We’ve yet to see more action from the Central Bank, but I think that at current oil levels we will not get to the ruble-denominated oil price of 3150 which is needed for the budget. This will lead to extreme devaluation of the national currency. For example, if this was to happen right now, the ruble would have dropped from 71 rubles per dollar to 85 rubles per dollar. This is too much, as Russia still depends heavily on imports (this statement was previously challenged by some readers, but I stand by my views and tried to explain them in more detail in the comments sections of previous articles). I think that the resulting exchange rate will likely be a compromise between the needs of the budget (and all the export companies, which are the majority of the Russian stock market) and the needs of curbing inflation. My prediction is that the ruble will settle in the area which allows 2900 – 3000 rubles per barrel of oil, implying 10.5% – 14% downside for the currency and for the dollar-denominated RSX. Also, I believe that constraints that low oil puts on the Russian economy are not fully reflected in the price of RSX. The Central Bank is predicting that GDP contraction will slow to 0.5% – 1.0%, but I think that these are optimistic figures. In the current oil price environment, there is no way to balance the interest of export-oriented companies, which are the majority of RSX holdings , and the economy. This problem will result in damage to every Russian company. All in all, I think that RSX is overvalued by 15% – 20% at current oil price levels. The downside increases if oil drops further, and such a drop will likely lead to a catastrophic liquidations of positions and a huge drop of RSX. On the other hand, if oil manages to deliver a major rally, the whole thesis will go bust. The next year is already behind the corner, so we will soon know how the thesis plays out.