The most recent notes released following the June meeting of the Federal Open Market Committee (FOMC) show members continuing to struggle to find an “elegant exit” from a period of extraordinary monetary easing, says Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.
“On the one hand, it is encouraging to see a vigorous debate at the Federal Reserve (the 'Fed') and a willingness to consider novel approaches to unwind the previously unprecedented measures that have been put in place over the last several years,” states Rodilosso, citing discussions about tools like an overnight reverse repo facility1. “On the other hand, I think there remains a high degree of uncertainty as to the efficacy of these policies, and that uncertainty continues to loom over the markets.”
Rodilosso notes that as the Fed considers a variety of tools, it appears to be sensitive to the potential unintended consequences of its actions. “They are trying to introduce a higher level of transparency, which is positive,” he says. “But they, and therefore we as bond investors, face so many unknowns over the next two years and beyond. Ironically, as a result of the current, extraordinary policy, the U.S. Treasury market appears to be struggling to price in all of the uncertainty.”
The Market Vectors ETFs portfolio manager suggests that the recent period of low interest rate volatility and healthy first-half bond market performance may turn out to be the calm before the storm.
“What happens as the downward pressure on rates gets further relieved, if at the same time the Fed has not demonstrated that they have a complete handle on the process?” he asks. “No one knows for certain because we have never been in this situation before. Given all these uncertainties, caution is definitely warranted in my opinion.”
Mr. Rodilosso has over 20 years of experience trading and managing risk in fixed income investment strategies, including more than 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHYTM), Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAGTM), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL®), International High Yield Bond ETF (NYSE Arca: IHY®), and Renminbi Bond ETF (NYSE Arca: CHLC®). As of June 30, 2014, the total assets for these ETFs amounted to approximately $1.6 billion.
1A facility that conducts reverse repurchase agreements, also called “reverse repos,” where securities are purchased with an agreement to sell them at a specified price at a specific future date.
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. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. ©2014 Van Eck Global.
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 $25.2 billion in assets under management, as of June 30, 2014, making it one of the largest ETF families in the U.S. and worldwide.
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.
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. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. The Funds may be 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; credit risk; hedging risk; interest rate risk; and short sale risk. Investors should be willing to accept a high degree of volatility and the potential of significant loss. For a more complete description of these and other risks, please refer to the Funds’ prospectus and summary prospectus.
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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.
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