An ETF for the Emerging-Markets Turn

In the last couple of months, many foreign assets have been marked down as the dollar has rallied. Whether that's a snapback or otherwise, the dollar rebound doesn't change the importance of foreign diversification for long-term investors, which includes fixed-income products.

The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY), listed last October, has behaved exactly as you might think. It has not been terribly volatile, but it has turned down some as the emerging equity markets have rolled over in recent months.

The paper the fund holds is dollar-denominated, so the greenback's move hasn't led directly to the decline. However, the price has pulled back as capital has been rotating out of emerging-market assets. In terms of delivering as-advertised exposure, the fund is worth a look.

As the chart below shows, PowerShares Emerging Markets did very little, which is not a bad thing for a bond fund, before rolling over slightly in June. Since then, it has returned to being stagnant. The comparison with the iShares Lehman 7-10 Year Treasury (IEF) shows an occasional zigzag effect vs. holding domestic Treasury debt. At different points in the cycle, the fund should provide price leadership, perhaps when U.S. rates start to rise.

PowerShares Emerging Markets provides equal access to 22 countries, ranging from those you might expect, such as Brazil, Turkey and Poland, to more adventurous investments such as Qatar, Uruguay and Vietnam. The riskiest country held would seem to be Venezuela. Every so often, Venezuelan officials suggest the country might cancel its debt. While that's unlikely, if it did happen the fund would take an instant 4.5% haircut.