ETF Update

An ETF for the Emerging-Markets Turn

Stock quotes in this article: PCY , IEF  

As previously mentioned, the bonds held in the fund are dollar-denominated. The advantage of this is that investors aren't directly exposed to occasional devaluations, which recently happened with the Vietnamese dong. The disadvantage is that holders can't participate in any future appreciation of the underlying currencies as some of the countries held achieve more global economic relevance.

Click here for larger image.

PowerShares Emerging Markets has been yielding close to 6% of late, net of its 0.50% fee, and it pays monthly. The fund blends higher-yielding countries, such as Russia, with lower yielders like Korea, meaning it offers diversification instead of nothing but high-yielding deficit countries that are vulnerable to the same pitfalls.

The fund's holdings have a variety of maturities, but 39% mature between five and 10 years and another 39% matures in 20 years or longer. The average credit rating for the holdings is BBB from Standard & Poor's and Baa2 at Moody's.

Emerging-market equities have been pasted in the last couple of months, and no one knows for how long that decline will continue. What is known is that the drop thus far has been very fast and that it can't go on forever. I would also add that this is not the first big and fast decline in this cycle. However, emerging markets are still important for constructing a diversified portfolio.

To have no exposure to emerging markets is a big gamble. This segment will turn up at some point, and PowerShares Emerging Markets is one way to benefit from that turn, a turn that is likely to be more robust than a rebound in the U.S.

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At the time of publication, Nusbaum no positions in stocks mentioned, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.





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