The Federal Reserve's unleashing of a third round of
quantitative easing lets risk-averse investors extend their stay
in safe-haven Treasuries, but presses those hungry for higher
yields to look elsewhere.
Several ETF strategists see opportunities in several areas of
fixed income. They offer their best ETF investing ideas for the
final quarter of 2012.
Tom Lydon, founder of ETFTrends.com in Newport Beach,
Calif., with $90 million in assets under management:
It's all about the yields these days. Investors are fed up with
Treasuries yielding under 2% as the Federal Reserve continues its
loose monetary policies, especially with interest rates slated to
remain near zero until mid-2015. Consequently, investors are
being forced into every corner that offers yields.
Thanks to the Fed, theSPDR Barclays Capital High Yield Bond
), with a 5.91% 30-day SEC yield, provides an attractive
alternative. While skeptics may be a little apprehensive about
noninvestment, speculative-grade debt, this junk bond ETF doesn't
mean it's junk. Year-to-date, the junk bond market has returned
Typically, speculative-grade bonds come with attractive yields
because of their inherently riskier nature. However, default
rates remain significantly depressed. For instance, U.S. default
rates were only at 3.5% as of the end of August. And Moody's also
stated that the trailing 12-month global speculative-grade
default rate is at 3% as of August. In comparison, the average
default rate since 1983 has been 4.8%.
Meanwhile, corporate America is still sitting on a lot of
cash, and balance sheets have been at their best in years. At
least they learned their lessons coming out of the 2008 financial
Nevertheless, because of their riskier nature, high-yield
bonds also move closer with the equities market, so potential
investors should be wary of their total allocations.
Daniel Weiskopf, managing director of Forefront in New
York with $125 million in assets:
Our overweighted positions are inMarket Vectors High-Yield
Muni ETF (
),SPDR Barclays Capital Convertible Bond (
) andPimco Total Return ETF (
). We are also longiShares JPMorgan USD Emerging Markets Bond (
The emerging market fixed-income markets offer diversification
of credit, currencies and correlation. In certain cases, they
offer relative value over the U.S. fixed-income markets with
shorter durations, higher credit quality and yield.
The degree of recent outperformance between emerging market
currency and dollar-denominated currencies ETFs is a trend we are
monitoring closely in this fourth quarter. The flight to quality
that has partially driven the outperformance may change in Q4 as
further perceived risk-taking drives higher returns and leads us
The challenge in the fixed-income market in the fourth quarter
and in the coming years is that low-single-digit returns are more
probable given global fixed-income prices. And if global
economies are going to get stronger, then fixed-income prices
should go down.
Conversely, prices could stabilize or rise because global
growth continues to stall. We are in unprecedented global
conditions, so predictions about trends are difficult to make.
Nevertheless, we are excited by the opportunities that exist in
using ETFs as a tactical tool.
While always seeking out to invest in long-term trends, we
believe that in using ETFs we will be able to take advantage of
inefficiencies in how ETFs trade, the ability to access markets
that are temporarily undervalued and the potential for the
reversal of the U.S. long-term Treasuries, which we see as
offering very little value after rallying over 25% to 36% year
John Graves, managing principal of the Renaissance Group
in Ventura, Calif., with $480 million in assets:
An interesting idea for Q4 isPowerShares Emerging Markets
Sovereign Debt (PCY). The yield is just shy of 5%. It is quite
inexpensive for an international bond account, which usually is
the most expensive of purchases in the world of manufactured
The current components are the sovereign debts of Vietnam,
Pakistan, Romania, Korea, Qatar and Turkey. The risk is certainly
higher than that from stronger balance sheet nations such as ...
. Well, there aren't many of those left these days, are
Of course, the risk is a result of the political situation in
each country as well as the currency risk between each nation and
the U.S. dollar. While the bonds in the ETF are all
dollar-denominated, that does not alleviate the forex risk; it
merely ameliorates it.
The decline during the winter of 2008-09 was in line with
everything else on the planet. If you ignore that disturbance,
then the historical chart looks rather benign.
Ignore that blip at your own risk. These are the debt of
nations that offer, at best, a smoky glass through which to view
their underlying finances.
Turmoil in the Islamic world would directly impact this
investment. A recurrence of the Chinese irritant for Vietnam
would have a similar effect.