The Federal Reserve's near-zero interest rate policy has
forced bond investors to travel to emerging markets this year for
PowerShares Emerging Markets Sovereign Debt (
) -- the No. 1 performing fund in its class -- was up 18.92% this
year going into Wednesday and 21.92% in the trailing year. By
contrast, the benchmark Barclays U.S. Aggregate Bond Index
returned 3.93% and 5.62% in those periods. Morningstar's emerging
markets bond ETF category gained 9.6% and 9.72%. PCY yields 4.75%
and charges 0.5% of assets a year as a management fee.
IShares JPMorgan USD Emerging Markets Bond (
), the largest of its class, yields 4.38% annually while charging
a 0.6% annual expense ratio. It's rallied 15.37% year to date and
18.53% in the past year.
Market Vectors EM Local Currency Bond ETF (
) returned 12.43% year to date and 9.97% in the past year. It
yields 4.38% and carries an expense ratio of 0.60%.
Coincidentally, both Ned Davis Research and TCW released
reports Tuesday recommending emerging market bonds. Here are five
bullish reasons to invest in these ETFs:
1. If global growth picks up next year, then emerging market
currencies will rally against the dollar, benefiting
dollar-denominated bonds, wrote Neil Leeson, ETF Strategist at
2. Emerging market bonds offer yields that are 475 basis
points (4.75%) on average over U.S. Treasuries yields and
diversify risk and sources of yield. "Based on returns and
volatility over the last decade, allocating 19% of a global
fixed-income portfolio to emerging market local currency bonds
would have improved annual average returns by 200 basis points
(2%), while reducing portfolio volatility by 100 basis points
(1%)," TCW wrote.
3. Most of the underlying bonds are investment-grade
4. Emerging market countries have greater prospects for
economic growth, smaller deficits and lower government debt
burden than many developed market countries. Heavy debt loads
will stunt growth as indebted countries pay back loans and cut
"EM local markets offer positive real interest rates
reflecting market-driven supply and demand for funding," TCW
wrote. "In contrast, financial repression through aggressive
quantitative easing has resulted in negative real rates of return
in the developed world."
5. Quantitative easing programs in developed markets will
likely devalue their currencies.
"Expansionary monetary policy in developed markets tends to
boost commodity prices and hence has a positive spillover to
emerging market trade balances," TCW wrote. "There are already
incipient signs of stabilization in global manufacturing
activity, which historically has triggered outperformance of
emerging markets as an asset class, in particular local currency
QuantShares Closes Three ETFs
The ETF graveyard keeps getting more crowded. FFCM is killing
three QuantShares ETFs after a year of trading because of zero
market interest. They are:
1.QuantShares U.S. Market Neutral High Beta Fund (
) with $4.8 million in assets.
2.QuantShares U.S. Market Neutral Anti-Momentum Fund (
), $3.2 million.
3.QuantShares U.S. Market Neutral Quality Fund (QLT), $3.4
Its four remaining ETFs also suffer from painfully thin trade
and assets, except forQuantShares U.S. Market Neutral Anti-Beta
ETF (BTAL), which has $25 million in assets.
Their last day of trading will be Friday, Nov. 2. These
closures come just two months after Russell Investments shuttered
all of its passively managed, quantitatively screened ETFs. It
suggests ETF investors prefer plain-vanilla indexing over
complicated strategies, Greek letters and financial lingo such as
momentum, high volatility and growth at a reasonable price.
Despite the failure, FFCM plans to introduce six new ETFs.