Much has been made in recent days of the decision by Moody’s to elevate
Turkey to investment grade status, but that country’s success is less a
standalone story and much more an indicator of a larger trend impacting
emerging markets (EM), said Fran
Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.
“Over the last decade, the majority of sovereign EM debt issuers have
significantly reduced their debt as a percentage of GDP,” said
Rodilosso. “The major rating agencies have taken notice, and
approximately 90 percent* of the issuers in the J.P. Morgan GBI-EMG Core
Index, which our Market Vectors Emerging Markets Local Currency Bond ETF
(EMLC) tracks, are now investment grade.” That ratio is up approximately
by 10 percent from the index’s inception in July 2010.
“This stands in sharp contrast with the trends that have shaped the
developing world over the past decade,” continued Rodilosso.
“Debt-to-GDP ratios** in developed nations have exploded upwards to the
point where developed sovereign issuers are projected to have more than
three times the debt burden of their EM counterparts.”
Rodilosso pointed out that while EM sovereign issuers have been paring
their debt ratios, a majority have also increasingly moved to issuing
debt in their own currencies, rather than in hard currencies. “For fixed
income investors, this makes it important to consider adding exposure to
emerging markets local currency sovereign debt,” he said.
Rodilosso went on to add that investing in this type of debt is not
without risks. “There are essentially three main types of risk in EM
sovereign debt,” he said, “credit risk, interest rate risk, and currency
risk. The credit risk story among these nations has, on the whole, seen
dramatic improvement in recent years, in my view. Emerging markets
central banks have not been pursuing the types of stimulus measures we
have seen undertaken in the U.S. and Japan, leaving them with more
flexibility to manage interest rates up or down as they see fit and at
least somewhat mitigating interest rate risk concerns.”
“Currency risk does remain a real concern though,” he continued.
“However, the relative independence of emerging markets central banks,
less repressive interest rate policies, lower sovereign debt levels, and
greater potential for growth all continue to support many emerging
Rodilosso also added that since these risks, as well as political risks
in many of these countries, remain real, investors would be well served
to consider adding diversified exposure to emerging markets local
currency debt as a means of mitigating risk and avoiding overexposure to
a single EM nation.
Mr. Rodilosso has 20 years of experience trading and managing risk in
fixed income investment strategies, including 17 years covering emerging
markets. Among the Market Vectors ETFs under his watch are Emerging
Markets Local Currency Bond ETF (NYSE Arca: EMLC), Treasury-Hedged
High Yield Bond ETF (NYSE Arca: THHY), Emerging
Markets High Yield Bond ETF (NYSE Arca: HYEM), Fallen
Angel High Yield Bond ETF (NYSE Arca: ANGL), International
High Yield Bond ETF (NYSE Arca: IHY), Investment
Grade Floating Rate ETF (NYSE Arca: FLTR), LatAm
Aggregate Bond ETF (NYSE Arca: BONO) and Renminbi
Bond ETF (NYSE Arca: CHLC). As of March 31, 2013, the total assets
for these ETFs amounted to approximately $1.9 billion.
Van Eck Associates Corporation does not provide tax, legal or accounting
advice. Investors should discuss their individual circumstances with
appropriate professionals before making any decisions.
Please note that the information herein represents the opinion of the
portfolio manager and these opinions may change at any time and from
time to time. This is not a recommendation to buy or sell any security
nor is it intended to be a forecast of future events, a guarantee of
future results or investment advice. Current market conditions may not
continue. Non-Van Eck Global proprietary information contained herein
has been obtained from sources believed to be reliable, but not
*Source: FactSet; S&P, as of May 2013
**Source: IMF World
Economic Outlook, general government gross debt to gross domestic
product, as of April 2013
Gross domestic product (GDP) - The
monetary value of all the finished goods and services produced within a
country's borders in a specific time period, though GDP is usually
calculated on an annual basis. It includes all of private and public
consumption, government outlays, investments and exports less imports
that occur within a defined territory.
Index returns assume the reinvestment of all income and do not reflect
any management fees or brokerage expenses associated with Fund returns.
Investors cannot invest directly in the Index. Returns for actual Fund
investors may differ from what is shown because of differences in
timing, the amount invested and fees and expenses.
The J.P. Morgan GBI-EMG Core Index is designed to track the performance
of bonds issued by emerging market governments and denominated in the
local currency of the issuer. The Index is designed to be investible and
includes only those countries that are accessible by most of the
international investor base. The Index Provider selects bonds from each
of the emerging market countries set forth below that are fixed-rate,
domestic currency government bonds with greater than 13 months to
maturity. As of June 30, 2012, the Index included 172 bonds of issuers
from the following countries: Brazil, Chile, Colombia, Hungary,
Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South
Africa, Thailand and Turkey.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and
span many asset classes, including equities, fixed income (municipal and
international bonds) and currency markets. The Market Vectors family
totaled $26.1 billion in assets under management, making it the fifth
largest ETP family in the U.S. and ninth largest worldwide as of March
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955,
Van Eck Global was among the first U.S. money managers helping investors
achieve greater diversification through global investing. Today, the
firm continues this tradition by offering innovative, actively managed
investment choices in hard assets, emerging markets, precious metals
including gold, and other alternative asset classes. Van Eck Global has
offices around the world and managed approximately $35 billion in
investor assets as of March 31, 2013.
There are risks involved with investing in ETFs, including possible loss
of money. Shares are not actively managed and are subject to risks
similar to those of stocks, including those regarding short selling and
margin maintenance requirements. Ordinary brokerage commissions apply.
Debt securities carry interest rate and credit risk. Interest rate risk
refers to the risk that bond prices generally fall as interest rates
rise and vice versa. Credit risk is the risk of loss on an investment
due to the deterioration of an issuer's financial health. The Funds'
underlying securities may be subject to call risk, which may result in
the Funds having to reinvest the proceeds at lower interest rates,
resulting in a decline in the Funds' income.
The Funds may be subject to credit risk, interest rate risk and a
greater risk of loss of income and principal than those holding higher
rated securities. As the Funds may invest in securities denominated in
foreign currencies and some of the income received by the Funds may be
in foreign currency, changes in currency exchange rates may negatively
impact the Funds’ returns. Investments in emerging markets securities
are subject to elevated risks which include, among others,
expropriation, confiscatory taxation, issues with repatriation of
investment income, limitations of foreign ownership, political
instability, armed conflict and social instability. Some Funds are
subject to risks associated with investing in high-yield securities;
which include a greater risk of loss of income and principal than funds
holding higher-rated securities, as well as concentration risk; hedging
risk; and short sale risk. Investors should be willing to accept a high
degree of volatility and the potential of significant loss. The Funds
may loan their securities, which may subject them to additional credit
and counterparty risk. For a more complete description of these and
other risks, please refer to the Funds’ prospectus and summary
The “net asset value” (NAV) of an ETF is determined at the close of each
business day, and represents the dollar value of one share of the ETF;
it is calculated by taking the total assets of an ETF subtracting total
liabilities, and dividing by the total number of shares outstanding. The
NAV is not necessarily the same as an ETF's intraday trading value.
Investors should not expect to buy or sell shares at NAV. Total returns
are based upon closing “market price” (price) of the ETF on the dates
Fund shares are not individually redeemable and will be issued and
redeemed at their NAV only through certain authorized broker-dealers in
large, specified blocks of shares called “creation units” and otherwise
can be bought and sold only through exchange trading. Creation units are
issued and redeemed principally in kind. Shares may trade at a premium
or discount to their NAV in the secondary market.
Diversification does not assure a profit nor does it protect against a
Investing involves substantial risk and high volatility, including
possible loss of principal. Bonds and bond funds will decrease in value
as interest rates rise. An investor should consider the
investment objective, risks, charges and expenses of a Fund carefully
before investing. To obtain a prospectus and summary prospectus, which
contain this and other information, call 888.MKT.VCTR or visit
vaneck.com/etf. Please read the prospectus
prospectus carefully before investing.
Van Eck Securities Corporation, Distributor
Avenue, New York, NY 10017