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Can Emerging Market ETFs Sustain The Rally?

After surviving a lackluster stretch, emerging market ETFs recoiled lately as a relief rally bolstered the demand for risky securities. The deterrents that came in its path earlier seem to have cleared as the U.S. rate hike bets have taken a backseat, marring the price of the greenback at the start of 2016. Impressive gains were noticed in commodity prices in the wake of a weaker dollar. Also, hopes of further stimulus from the eurozone and Japan, China’s relentless efforts to shore up its waning economy and the hunger for higher current income (as a drive for safety encouraged the need for fixed-income investing, which in turn affected U.S. Treasury bond yields) made emerging market space a rising star lately. The winning trend can be validated by 10.4% and 11.1% returns realized respectively by the two most popular ETFs, the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ) and the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ), in the past one month (as of March 8, 2016), against gains of 7.6% for the all-world exchange-traded fund, the iShares MSCI ACWI index ETF (NASDAQ: ACWI ), and a 7% uptick in the S&P 500-based fund, the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). As of now, the drivers of the rally look fragile. Investors may cheer the recent reserve requirement ratio cuts in China, but these have hardly boosted the Chinese markets. Rather, weak Chinese trade data has been pushing its market down, along with other emerging market securities. On the other hand, the recent rally in oil prices is anything but stable, keeping a check on the broad-based global market recovery. Meanwhile, the U.S. economy came up with some upbeat economic numbers on manufacturing, jobs, inflation and consumer confidence. All these once again brought back rate hike talks on the table. If any such cues are given by the Fed in its upcoming meeting, the emerging markets will once again lose luster. All in all, the operating backdrop is not all bright. So, investors should practice caution while targeting this investing arena. Below, we highlight a few ETFs that can be considered in the days to come (see all emerging market ETFs here ). High Yield – WisdomTree Emerging Markets Equity Income ETF (NYSEARCA: DEM ) As foreign investors normally park their money in the riskier emerging market bloc for higher yields, what could be a better choice than DEM? This $1.31 billion ETF holds about 320 stocks. Though the fund is heavy on trouble zones like China, Russia and Brazil, and might see a sell-off ahead, a 30-day SEC yield of 6.29% would provide some protection against capital erosion. Also, the fund has highest exposure in the relatively better-placed zone, Taiwan. The fund has a Zacks ETF Rank #3 (Hold) and is up about 6% this year (as of March 8, 2016). Low Volatility – iShares MSCI Emerging Markets Minimum Volatility ETF (NYSEARCA: EEMV ) A low-volatility portfolio is yet another key to long-term success. For investors seeking exposure to the emerging markets, EEMV could be an intriguing pick. The $2.9 billion ETF charges 25 bps in fees. In total, the fund holds over 250 stocks in its basket, with each accounting for less than 1.71% share. The fund has a slight tilt toward financials, with 26.8% share, while information technology, telecommunication services and consumer staples round off the next three spots. The fund has retreated 0.2% in the year-to-date frame (as of March 8, 2016), was up 6.2% in the last one month and it has a Zacks ETF Rank #3. High Quality – SPDR MSCI Emerging Markets Quality Mix ETF (NYSEARCA: QEMM ) High-quality ETFs are generally rich on value characteristics, as these focus on stocks having high-quality scores based on three fundamentals factors – the performance of value, low volatility and quality factor strategies. This fund follows the MSCI Emerging Markets Quality Mix Index, holding a large basket of 744 stocks. It has amassed about $97.3 million and charges a low fee of 30 bps per annum. The fund puts more weight in China, Taiwan and South Korea. The Zacks Rank #3 fund was up 7.7% in the last one month, but off 1.2% year to date, and it yields about 2.13% (as of March 8, 2016). Original Post

How To Look At Negative Yields Inside A Portfolio

Negative yields on bonds are no longer unicorns. In Switzerland, Germany, Denmark and several other European countries, government bonds are trading at negative nominal yields. Recently, the Bank of Japan announced it is adopting negative interest rates. For investing, there are four potential reasons that can illustrate trade-offs between different investment strategies as a result of negative interest rates. First and foremost, negative yields could simply be a consequence of active monetary policy (with the expressed goal of stimulating economic activity) in a world where bond supply and demand is not balanced. Central banks in major developed economies have amassed close to $12 trillion in government bonds since 2004, and still remain a source of demand of close to $3 trillion a year. Meanwhile, the net issuance of government bonds of about $2.5 trillion has been on the decline since 2013. This demand mismatch is likely one of the reasons there are $6.3 trillion in government bonds outstanding trading at a negative yield. This represents about 10 percent of total outstanding government debt worldwide, estimated by McKinsey to $58 trillion. Second, negative yields could potentially be correctly forecasting a sharp economic slowdown, which, as a consequence, could lead to an increase in defaults (both corporate and sovereign) in the future. Paying up now and receiving less nominal money in the future can be profitable if the price of goods has fallen sufficiently. Third, negative yields could also be a consequence of the ecology of current market participants. Choosing to not own these government bonds as an active allocation decision can (even with good cause due to their negative yields) carry risk for certain investors – e.g., the potential for higher tracking error to their benchmark or underperformance versus their peers. That said, as government bonds have an increased representation in many bond indexes that are used as benchmarks, holding these bonds to stay close to the benchmark also carries a cost: lower absolute returns due to a portfolio with an increasing component of negative return. Fourth, certain investors who have a preferred investment horizon may require a meaningful risk premium to buy bonds with maturities outside their preferred habitat. For instance, when investors with a shorter horizon are faced with short-term yields in negative territory, the steep slope of the yield curve and longer-maturity bonds might provide the inducement to buy longer bonds. Because they join other investors who invest regularly in longer maturities as part of their own preferred habitat, the ensuing higher demand could be a reason for negative yields on longer-maturity bonds, as was recently the case in Switzerland and Japan. And lastly, negative interest rates cause currency volatility and capital flight. By adopting a negative rate to weaken the currency, the true goal is to apply a haircut to government debt that is unsustainable as GDP growth stays anemic. The result is negative interest rates lead to one currency appreciating to super strength, namely the US dollar, while the rest of the world’s currencies depreciating by central banks printing money. The result of negative rates is the opposite from what it was intended; instead of a stimulus, it has led to deleveraging debt. The effect was first through the energy sector by causing distress in high yield markets that has now spread more broadly. ​ Portfolio Strategy If one believes negative yields are primarily due to demand from passive or indexed investors, then an active investment strategy should tolerate the tracking error and take the other side of the indexing herd. Despite the profit uncertainty of investing in negative yielding bonds, there is a logical approach to constructing robust portfolios. First, control exposure to risk factors where the uncertainty of outcomes may be the most severe, for instance, by adjusting overall portfolio duration. Second, tilt portfolios in directions where relative asset valuation is more attractive, e.g. equity and bonds of companies with solid fundamentals. Third, look for sources of diversification, where the ultimate and eventual resolution of the negative yield conundrum is likely to create large trends and market movements. And finally, in very broad terms, aggressive central bank intervention with negative interest rates continues to underwrite risk taking. At the same, negative rates also cause volatility, currency depreciation and deleveraging of debt. So as more central banks jump on the bandwagon to drive rates more negative, an appropriate asset allocation of conservative, higher quality credit risk, floating rate exposure, and maintaining high liquidity remains prudent. 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. I have no business relationship with any company whose stock is mentioned in this article.

ETF Update: February May Have Started Slow, But It Finished With A Flood

Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.). Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. Before we jump into what happened in the ETF industry in the last three weeks, I wanted to bring up an opportunity for authors, and potential authors, who are looking to learn more about the writing process and improve their craft. My colleague, Rocco Pendola , is currently running The Seeking Alpha Author Experience , an information series to further the partnership between Seeking Alpha and our contributors. In his own words: Our goal is to provide an unprecedented resource for author success and, more specifically, one that helps writers reach and keep expanding the boundaries of their individual potential. As a writer, you have personal style, your own voice and analytical and rhetorical ways you go about helping other investors. We’re not here to change that. We simply want to A) help you optimize your approach, B) share what we have seen work from a broad and diverse sample of techniques and C) be here to answer questions and concerns you have related to the best ways to get your message across to investors. I’ve had a number of contributors and new authors reach out to me because of the ETF Update series, and I imagine there are more of you who would be interested in contributing but have questions about the process. If interested in learning more, use the form at the following link to sign up for The Seeking Alpha Author Experience . Rocco sends all Author Experience materials out in installations via email, so while part of a community of contributors, you can receive one-on-one attention simply by clicking “reply.” You will receive no more than one email per day. I have been reading along and really enjoy his insights, so if you are looking to learn more about writing and contributing to Seeking Alpha I would highly recommend signing up. Now back to the regularly scheduled ETF content. While the first two weeks of the month only saw four launches , the month ended with 11 more. Markets also started to show signs of life again in mid-February, which is good news for ETFs looking to attach investors. As we have a lot to catch up on and there any many others on this platform covering the broader picture, lets jump right in! Fund launches for the week of February 15th, 2016 UBS (NYSE: UBS ) launches the first of many ETFs (2/16): The UBS AG FI Enhanced Europe 50 ETN (NYSEARCA: FIEE ) was the first of 3 launches from ETRACs, the ETF division of UBS, over a week. FIEE is an exchange traded note linked to the performance of STOXX Europe 50 USD (Gross Return) Index, the largest blue-chip stocks in the STOXX Europe 600. The 3 largest holdings are Nestle ( OTCPK:NSRGF ), Novartis (NYSE: NVS ) and Roche ( OTCQX:RHHBY ), all Swiss companies like UBS. UBS’s second launch of the week (2/18): The ETRACS S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA: OILX ) “reflects the excess returns that are potentially available through an unleveraged investment in the contracts comprising the index, plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts,” according to a press release at its launch. This is not a new product idea, but with an expense ratio of 0.50% OILX is able to undercut the existing competition. ProShares gives its futures strategy ETF another chance (2/18): Later in March ProShares will be shutting down a couple funds that never found traction in the market, including the ProShares Managed Futures Strategy (NYSEARCA: FUTS ). However, in preparation of this closing, ProShares launched the ProShares Managed Futures Strategy ETF (BATS: FUT ), which is a new and improved version of FUTS. The fund structure has been updated in a number of ways, but the largest change in my opinion is that investors no longer need to fill out a K-1 form, which could have been a sticking point for the lack of interest before. For further analysis on FUT please read ” ProShares Re-Configures Its Managed Futures ETF Effort ” by Brian Haskin. Fund launches for the week of February 22nd, 2016 UBS wraps up a busy week with a high yield ETN (2/22): And for UBS’s final launch in February, the UBS AG FI Enhanced Global High Yield ETN (NYSEARCA: FIHD ). This fund, designed for Fisher Investments, tracks the MSCI World High Dividend Yield USD Gross Total Return Index. This makes FIHD very similar to the Barclays ETN+ FI Enhanced Global High Yield ETN (NYSEARCA: FIGY ), which tracks the same index and was also created for Fisher Investments. Pacer Financial expands its ETF lineup (2/23): For Pacer’s 6th ETF it introduced the Pacer Global High Dividend ETF (BATS: PGHD ), self described as “a strategy driven exchange traded fund that attempts to provide a continuous stream of income and capital appreciation over time by screening for companies with a high free cash flow yield and a high dividend yield.” By tracking the companies with the highest levels of free cash flow and dividend yields in the FTSE All World Developed Large Cap Index, PGHD hopes to return strong dividends for investors looking for global exposure. For further analysis on PGHD please read ” New High Dividend ETF With Free Cash Flow Focus By Pacer ” by Zacks Funds. Cambria launches a high yield bond ETF (2/23): The Cambria Sovereign High Yield Bond ETF (Pending: SOVB ) seeks return for investors through investing in high risk, high reward bonds either directly or through other exchange-traded products. “Foreign bonds are the largest asset class in the world, yet dramatically underrepresented in investor portfolios,” said Meb Faber , Cambria Chief Investment Officer, in a press release for the fund. “Moving away from a market-cap strategy and employing a value lens to foreign government bonds could help investors gain smarter access to income in a yield-starved environment.” WisdomTree expands in the Put/Write Space (2/24): The WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEARCA: PUTW ) is the company’s first options strategy ETF, offering a collateralized put write strategy on the S&P 500. As described on the fund’s homepage, “the strategy is designed to receive a premium from the option buyer by selling a sequence of one-month, at-the-money, S&P 500 Index puts (SPX puts). If, however, the value of the S&P 500 Index falls below the SPX Put’s strike price, the option finishes in-the-money and the Fund pays the buyer the difference between the strike price and the value of the S&P 500 Index.” For further analysis on PUTW please read ” Finally, Is PUTW The One We’ve Been Waiting For? ” by Reel Ken. Janus adds to ETF offerings (2/25): Open for business today are the Janus Small Cap Growth Alpha ETF (NASDAQ: JSML ) and the Janus Small/Mid Cap Growth Alpha ETF (NASDAQ: JSMD ). They are the first ETFs to launch since Janus’ (NYSE: JNS ) November 2014 purchase of VelocityShares. Both are what Janus calls Smart Growth ETFs utilizing a systemic process to identify resilient small and mid-cap companies poised for long-run sustainable growth. Janus’ ETP business had about $3.2B in AUM across 17 products as of year-end. Fund launches for the week of February 29th, 2016 Vanguard targets international dividend stocks with new funds (3/2): The company yesterday launched the Vanguard International High Dividend Yield ETF (NASDAQ: VYMI ) and the Vanguard International Dividend Appreciation ETF (NASDAQ: VIGI ). Both ETFs come alongside “investor” and “admiral” classes of mutual funds. VYMI, with a 0.3% expense ratio, tracks the FTSE All-World ex-U.S. High Dividend Yield Index which has more than 800 of the highest-yielding large- and small-cap stocks in both developed and emerging markets. VIGI, with a 0.25% expense ratio, tracks the Nasdaq International Dividend Achievers Select Index, which holds about 200 stocks with long track records of dividend boosts. The funds are international cousins to the $12B Vanguard High Dividend Yield Index Fund (NYSEARCA: VYM ) and the $19B Vanguard Dividend Appreciation Index Fund (NYSEARCA: VIG ). The new products also have cheaper fees than the SPDR International Dividend ETF (NYSEARCA: DWX ), which charges 0.45%, and the iShares International Select Dividend ETF (NYSEARCA: IDV ), which charges 0.5%. Goldman boosts ETF lineup (3/4): Goldman Sachs’ (NYSE: GS ) burgeoning ETF operation now offers five funds after the launch of the Goldman Sachs ActiveBeta Europe Equity ETF (NYSEMKT: GSEU ) and the Goldman Sachs ActiveBeta Japan Equity ETF (NYSEMKT: GSJY ). As with the previous three ETFs which dame to market late last year, the two new funds were opened with institutional assets of $25M each. Each has an expense ratio of 0.25%. Those original three now have more than $1B in combined AUM. In addition, the Goldman Sachs ActiveBeta International Equity ETF (NYSEARCA: GSIE ) – which came to market in November – has its fee cut to 0.25% from 0.35% Fund closures for the weeks of February 15st, 22nd and 29th, 2016 Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.