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3 Tips For Investing In Emerging Markets

By Tim Maverick Having been a neglected asset class for some time, emerging market stocks are enjoying a healthy rebound so far in 2016. The story of how we got here is a familiar one. When developing stock markets got overbought, they became overvalued. As a result, nervous investors – mainly from the United States – dumped those assets. But the selloff led to a sharp 180-degree turn – emerging markets then traded at a 28% discount to developed countries. Research Affiliates, founded by noted investor Rob Arnott, explains that emerging market stocks have only been cheaper than current levels six times. Each of those periods sparked an average five-year return of 188%. That should grab any investor’s attention. So what’s the best way to invest in emerging stock markets? Based on my decades of experience as both an advisor and an investor, I’ve compiled three quick tips to help you make sense of this market trend . Tip #1: Do NOT Use Index Funds I’m not a fan of index funds in general… but especially when it comes to emerging markets. It’s a sure-fire way to be unsuccessful. Why, you ask? First, because indices severely restrict your investable universe. And they’re usually restricted to the most overbought and overvalued stocks. Case in point: The Institute of International Finance points out that only $7.5 trillion out of a total of $24.7 trillion in emerging market equities are covered by indices from MSCI and JPMorgan (NYSE: JPM ). The rest are simply ignored as if they don’t exist. Yet, it’s those ignored stocks that usually boast the best bargains and room for growth. Tip #2: Avoid The Closet Index Trackers Even if you do avoid index funds directly, there’s another problem: “Closet trackers.” These are fund managers who like playing it safe. They couldn’t care less about outperforming the benchmark index for their shareholders. These managers have at least 50% of their funds in index stocks, so their funds will mimic the underlying index. Needless to say, that’s not what you want. Worryingly, a study from the World Bank revealed that 20% of equity funds were index trackers or closet trackers. This is a complete waste of money from an investor’s viewpoint. You’re paying for active management, but you’re not getting it. One example of a mutual fund company that usually goes off the beaten track and often invests in smaller companies is the Wasatch Core Growth Fund No Load (MUTF: WGROX ). Though I do not own their emerging market fund, I do own their frontier markets fund – Wasatch Frontier Emerging SmallCountries Fund (MUTF: WAFMX ) – for exposure to the smaller frontier markets. Please note: The fund is closed to new investors if you try buying it through your brokerage, but if you go directly to the fund company, it’s still open. Tip #3: Get Local Exposure If you truly want exposure to developing markets, guess what? You’ll need to own shares in local companies. And while it may seem like a clearer route to a profit, don’t do what many U.S. advisors espouse and have your sole exposure through multinational companies. Yes… there are many great multinationals with huge emerging market businesses – a company like Colgate Palmolive Co. (NYSE: CL ) comes to mind – they’re not the best way to gain exposure to developing markets’ economic growth. I like to use this analogy when explaining this point to clients: Let’s say a Japanese investor wanted exposure to the U.S. economy. His broker recommends Toyota Motors Corp. (NYSE: TM ). After all, Toyota sells a lot of cars in the United States. Silly, right? Toyota shares aren’t a good way to play the overall U.S. economy, as the stock only represents a very select fraction of market success. Neither is investing in emerging markets solely through multinationals. Investing in emerging local companies is the best way to profit from more specific foreign trends. There are all manner of resources available these days for researching foreign companies and stocks. It does take a bit of work, but the rewards can be well worth the time. Alternatively, you can leave the work to proven, active fund managers. Regardless of which route you prefer, now is a good time to build positions in emerging markets. Original Post

ETFs To Watch Post Fed Meeting

As expected, the Fed kept the short-term interest rates steady in the 0.25-0.50% band in its meeting and dialed back its projection for this year’s hikes. The central bank now expects federal funds rate to rise to 0.875% by the end of the year, implying two lift-offs, compared with 1.375% that signals four rate hikes. The cautious approach came on the heels of increased market volatility, global growth concerns, and softness in exports and business investments. Given the circumstances, the Fed lowered the economic growth outlook for the year to 2.2% from 2.4%. However, it stated that economic activity has been expanding at a moderate pace amid global slowdown. This is especially true as unemployment dropped to an eight-year low of 4.9% and inflation climbed 2.3% in the 12 months through February, marking the biggest increase in more than three years, following the 2.2% increase in January. Further, cheap fuel will continue to lift consumers’ spending power, thereby, boosting economic growth. Notably, gas price has fallen by 46 cents from the year-ago period to an average of $1.96 per gallon that has resulted in about $1,000 more to spend at each household. Market Impact The move has led to a rally in the stock market with the Dow Jones Industrial Average and S&P 500 reaching the highest levels of 2016. With this, the stocks are on track for the fifth consecutive week of gains. This is because lower rates will step up economic growth by reducing borrowing costs and lowering the risks associated with expanding businesses or starting new ones. Additionally, demand for high-yield securities returned with the Fed’s lowered rate hike outlook and the two-year Treasury yields logged the biggest one-day decline in six months while the 10-year Treasury yields hit 2% for the first time since late January. On the other hand, the WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, dropped to its lowest level since October. Given this, we have highlighted three ETFs that will likely benefit the most from the Fed’s move and a couple of ETFs that will be severely impacted. ETFs to Gain SPDR Gold Trust ETF (NYSEARCA: GLD ) Gold has been on a tear this year as increased market volatility has perked up demand for the yellow metal as a store of value and hedge against market turmoil. Additionally, the expectation for longer-than-expected low rates will continue to raise the appeal for the gold bullion. As a result, GLD, which tracks the price of gold bullion measured in U.S. dollars, spiked 2.2% at the close on the day after the Fed rate announcement. GLD is the ultra-popular gold ETF with AUM of $31.3 billion and average daily volume of around 8.1 million shares a day. Expense ratio comes in at 0.40%. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Mortgage Real Estate Capped ETF (NYSEARCA: REM ) Mortgage REITs would benefit from lower rates as short-term rates would rise slower than the long-term rates thereby leading to a wide spread and higher profits for mREIT companies. The ultra-popular REM, with AUM of $759.2 million and average daily volume of around 1.2 million shares, gained 1.3% after the Fed meeting. It tracks the FTSE NAREIT All Mortgage Capped Index and holds 37 securities in its basket with large allocations to the top two firms – Annaly Capital (NYSE: NLY ) and American Capital Agency (NASDAQ: AGNC ). These two firms collectively account for a combined 29.2% share while other securities hold less than 7.9% share. The fund charges investors 48 bps a year in fees and has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) Low interest rates have made the high-yield corner of the fixed income world a hot investment area, drawing investors in huge numbers. HYG, in particular, could be an intriguing pick, charging investors 50 bps in fees per year. It is the largest and most liquid fund in the high yield bond space with AUM of $16.2 billion and average daily volume of more than 13.2 million shares. The fund tracks the iBoxx $ Liquid High Yield Index and holds 992 securities in the basket. Effective duration and average maturity are 3.99 and 4.83 years, respectively. HYG added 0.7% on the day and has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook. ETFs to Lose PowerShares DB US Dollar Bullish Fund (NYSEARCA: UUP ) Lower interest rates will pull out capital from the country and lead to depreciation of the U.S. dollar. As such, UUP shed 1.1% on the day. The fund offers exposure to the greenback against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. It follows the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. So far, UUP has managed an asset base of $801.9 million while sees an average daily volume of around 1.6 million shares. It charges 80 bps in total fees and expenses, and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook. SPDR S&P Regional Banking ETF (NYSEARCA: KRE ) As the rates are expected to remain low for long, financials stocks will take a hit. In particular, the ultra popular KRE, having AUM of $1.9 billion and average daily volume of 6.2 million shares, has lost 1.1% following the Fed meet. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 93 securities in its basket, the fund is widely spread out across each security with none holding more than 4.46% share. The product has a Zacks ETF Rank of 2 with a High risk outlook. Original Post

Junk Vs. Investment Grade Corporate Bond ETFs

The high-yield junk bond market was a troubled zone in 2015 due to the dual threats of the oil price collapse and the Fed lift-off. As a result, the high-yield or junk bond ETF space was deep in the red. Even the investment-grade corporate bond ETFs gave muted performances last year thanks to the rising rate worries, but the decline was lesser than the junk bond ETFs. The fact that the U.S. energy companies are closely tied to the high-yield bond market, with the former making up about 15% of junk bond issuance, has been blamed for the massacre, as per CNBC . Thus, fears of their default amid the oil price rout triggered the junk bonds’ sell-off last year. Who is the Winner So Far This Year? However, things started to change at the start of 2016. Hard landing fears in China, crash in global financial markets and no meaningful recovery in the Japanese and European economies brightened the bid for safety this year. As investors flocked to U.S. treasuries, the yield on the benchmark 10-year Treasury bonds has remained under 2% since February. This in turn sharpened the drive for high income and brought junk bond ETFs back into the business as investors downplayed the default issues associated with junk bond ETFs. Added to this, the recent rebound in oil prices and the resultant risk-on sentiments in the market triggered investor interest in the junk bond ETF space. Plus, cheaper valuation after two subdued years made the area relatively well positioned to bet on. Investors poured more than $1.16 billion and $1.13 billion respectively in the SPDR Barclays High Yield Bond ETF (NYSEARCA: JNK ) and the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) in the five days ending March 3, 2016. Investment-grade corporate bond ETFs, however, fell slightly below junk bond ETFs since the former offer lesser yields. The outperformance in the latter was more palpable in the last one-month time frame (as of March 8, 2016). Investment-Grade Leaders In the last one month, top performances were put up by the Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT ) , Credit-Scored U.S. Long Corporate Bond (NASDAQ: LKOR ) and Investment Grade Interest Rate Hedged ETF (BATS: IGHG ). While VCLT and LKOR added 2.8% each, IGHG advanced 2.4%. Junk-Bond Winners On the other hand, junk bond ETFs clearly surpassed the investment-grade bond ETFs in the last one-month frame. Below, we highlight three such ETFs. ProShares High Yield-Interest Rate Hedged ETF (BATS: HYHG ) – up 9.9% HYHG is an ETF, which has an interest rate hedge built into its strategy as it takes a short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield of about 6.40% (and a modest expense ratio of just 50 basis points) indicating that this could be a safer bond and yield play for investors anxious about the possibility of rising rates. The fund is up 0.9% so far this year. Market Vectors Fallen Angel Bond ETF (NYSEARCA: ANGL ) – up 7.8% This innovative fund uses the sampling strategy to track the performance of the BofA Merrill Lynch US Fallen Angel High Yield Index and focuses on ‘fallen angel’ bonds. Fallen angel bonds are high yield securities that were once investment grade but have fallen from grace and are now trading as junk bonds. The fund yields 5.28% annually while it charges just 30 bps in fees. The fund was a top performer even in the year-to-date frame having scooped up 4.3% gains. SPDR Barclays Capital High Yield Bond ETF (JNK) – up 6.8% This fund includes publicly issued U.S. dollar denominated, non-investment grade corporate bonds. The corporate sectors are Industrial, Utility and Financial Institutions. The fund has scratched up 0.4% gains this year and yields 6.62% in dividend. Original Post