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Riskier Bond ETFs For A More Dovish Fed Outlook

By Max Chen and Tom Lydon With the Federal Reserve holding interest rates and only anticipating two rate hikes this year, fixed-income investors may turn to riskier debt securities and related exchange traded funds, reports industry analyst ETF Trends . The Fed’s dovish stance sent the U.S. dollar retreating, with the Dollar Index down about 1.9% since the Fed’s Wednesday announcement. “Any weakening of the U.S. dollar will support emerging markets that have issued U.S. denominated debt and will take pressure off of China’s need to manage their currency,” Matthew Whitbread, investment manager at Baring Asset Management, said on CNBC . “This would bode well for investors able to allocate to select emerging market currencies and local bond markets.” Fixed-income investors may gain exposure to U.S. dollar-denominated emerging market debt through ETF options. For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA: EMB ) has a 7.01 year duration and a 5.30% 30-day SEC yield. The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA: PCY ) has a 8.34 year duration and a 5.90% 30-day SEC yield. The Vanguard Emerging Markets Government Bond ETF (NASDAQ: VWOB ) has a 6.2 year duration and a 4.95% 30-day SEC yield. Year-to-date, EMB rose 3.9%, PCY gained 3.6% and VWOB returned 3.4%. Additionally, with emerging market currencies appreciating against the greenback, local-currency emerging market bond ETFs have also been outperforming. For local currency-denominated emerging market bond ETFs, the iShares Emerging Markets Local Currency Bond ETF (NYSEARCA: LEMB ) has a 4.77 year duration and a 4.73% 30-day SEC yield. The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA: EMLC ) has a 4.76 year duration and a 5.95% 30-day SEC yield. The actively managed WisdomTree Emerging Markets Local Debt Fund (NYSEARCA: ELD ) has a 5.01 year duration and a 5.89% 30-day SEC yield. Year-to-date, LEMB increased 3.7%, EMLC advanced 6.6% and ELD gained 5.3%. “Overall, a more dovish Fed should support risky assets, in particular high yield credit that benefits both from falling yields as well as economic growth,” Whitbread added. For instance, over the past two days, the SPDR Barclays High Yield Bond ETF (NYSEARCA: JNK ) was up 1.7% and the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) was 1.2% higher. JNK has a 4.26 year duration and a 7.28% 30-day SEC yield. HYG has a 4.01 year duration and a 7.26% 30-day SEC yield. 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.

The Benefits Of Currency-Hedged International ETFs

By Max Chen and Tom Lydon Currency-hedged exchange traded funds have become a popular way to access international markets while hedging currency risks. While some may be concerned about the costs of implementing these currency hedges, the benefits have outweighed the costs, reports ETF Trends . For developed international market exposure, investors have turned to broad EAFE – developed Europe, Australasia and Far East – Index ETFs, like the iShares MSCI EAFE ETF (NYSEArca: EFA ) and Vanguard FTSE Developed Markets ETF (NYSEArca: VEA ) . However, when accessing overseas markets, investors will be exposed to currency risks – a strengthening U.S. dollar or weakening foreign currency diminishes international equity returns. Alternatively, investors may look at a number of currency-hedged international ETF options to capture foreign exposure while hedging currency risks, such as the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF ) , which utilize currency forward contracts to diminish the negative effects of weaker foreign currencies. Some may be concerned about the costs to implement the hedging strategy, especially as fund managers sell a foreign currency forward at a different rate to where the spot rate is. Investors typically bear a hedging cost when the interest rate is higher on a foreign currency than it is on the U.S. dollar, Deutsche Asset Management strategists Abby Woodman, Dodd Kittsley and Robert Bush said in a research note. On the other hand the opposite is also true. When U.S. rates are higher than foreign ones, hedging becomes a net benefit for U.S. investors as there is a “positive cost of carry.” “For many currencies today, including the euro, pound, yen and Swiss franc, one-month interest rates are lower than they are for the U.S. dollar, resulting in a hedging ‘benefit’ to U.S.-based investors removing their international foreign exchange (NYSE: FX ) exposures,” Deutsche strategists said. Looking at DBEF’s underlying MSCI EAFE currencies, we see that that five of the 12 developed market currencies show negative one-month deposit rates, including a -0.17% rate for the euro, which makes up 30.4% of the EAFE index, a -0.21% rate on the Japanese yen, which is 24.2% of the index, and -0.74% rate on the Swiss franc, which is 9.3% of the benchmark. More importantly, most foreign currency rates to the USD show a positive spread – the U.S. dollar rate is higher than the foreign rates, which provides a positive cost to carry, or a benefit, for hedged investors. Specifically, among the top four currency exposures, which make up 83% of the EAFE Index’s weighting, the EUR shows a +0.70% spread to USD, JPY shows a +0.74% spread to the USD, the GBP has a +0.03% spread to the USD and the CHF has a +1.27% spread to the USD. “Anytime the U.S. dollar rate is higher than the foreign rate (the ‘Spread to USD’ row is positive) then there will be a positive cost of carry,” the Deutsche strategists added. “Or, to put it another way, the investor gets paid to hedge.” Currently, investors with currency-hedged developed EAFE market exposure are receiving a positive cost of carry from each of the four biggest currencies in the international basket. Deutsche X-trackers MSCI EAFE Hedged Equity ETF Click to enlarge 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.

Your Strategy Will Sometimes Lag, And That’s OK

By Roger Nusbaum, AdvisorShares ETF Strategist Barron’s featured an ETF Roundtable that focused on smart beta funds . The actual discussion wasn’t all that interesting, but there was an important general point made about investment strategies. Gray: Value investing is driven in part by behavioral biases-otherwise, why wouldn’t everyone just be Warren Buffett and buy cheap stocks and hold them? They don’t because if you hold concentrated, cheap-stock portfolios, there will be multiple years when you’ll get your face ripped off. You need clients that understand how true active strategies work over the long term. Indeed, the cheapest U.S. stocks have trailed more expensive growth stocks for nine years now. Whistler: The challenge with strategic beta, or any factor-based investment, is that they can underperform a traditional cap-weighted index for quite a long period-two, three, even five years. For purposes of this blog post, value investing is merely an example. There are plenty of valid strategies that could replace value in the excerpt. The passage is important, because it accepts as an inevitability that any given strategy will have periods where it lags. Value has lagged for the entire bull market until this year, according to another Barron’s article from this weekend, but there is no sentiment that somehow value is not a valid investment strategy. Value or growth, buy and hold no matter what, indexing or passive and so on and on are all capable of getting the job done. Underperformance for a couple of years, although completely normal, potentially breeds impatience, which can lead to chasing the performance of what just did well in the expectation that it will continue to do well. In simplistic terms, something that just outperformed last year has a good chance of underperforming this year. The person who perpetually chases last year’s winner has a high likelihood of always lagging, which does not have to be ruinous, but does make things harder over the long term in terms of keeping pace with the projection of “the number.” My preference is to maintain exposure to various market segments: small cap/large cap, growth/value, foreign/domestic, high dividend/no or low dividend and so on. And like any approach out there, there are times where my preference outperforms and times where it lags. More important than returns are savings rates and the avoidance of self-destructive investment behaviors. At a high level, everyone knows they need to save money, but doing it is the hard part. People who save 10%, 15% or more are making things easier for their future selves and are acting on the thing they have far more control over – saving money, versus the whims of the capital markets. Chasing previous top performers is just one of countless behavioral things that people do to themselves. My hope in revisiting these building blocks, especially when others in the field say essentially the same thing, is that hopefully, more market participants will come to realize that how they are doing in 2016 simply won’t matter in the long run. As I often mention in this context, “Without looking, how’d you do in the first quarter of 2012?” The only way someone is likely to know is if something catastrophic happened to their portfolio. 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. Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such securities. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice, and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk, which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs, visit our website AdvisorShares.com .