Foreign bonds have always been one of my favorite areas for genuine diversification. Historically speaking, foreign bonds do not correlate negatively or positively with stocks.
Until recently, however, ETF investors had slim pickings. You had vehicles such as SPDR DB International Gov’t Inflation Protected (WIP) as well as SPDR Barclays International Treasury (BWX). Yet WIP and BWX experienced enormous difficulties during the U.S. subprime disaster; moreover, neither looks fit for consumption in the present-day sovereign debt crisis.
Fortunately, fund families have been introducing non-dollar and non-euro denominated bond ETFs. For those who wanted emerging market bond yields in appreciating currencies (and yes ... that included me), WisdomTree Emerging Market Local Debt (ELD) appeared to be a godsend. And in many ways, WisdomTree Asia Local Debt (ALD) may have seemed even more appealing.
Both ALD and ELD provide an income stream with capital appreciation potential. And at their inception, they were met with enormous enthusiasm. Even today, if safety-seeking were a rational process, investors should be intrigued by governments capable of paying their debts in currencies that, for the most part, are not being devalued by weak monetary/fiscal policies.
Instead, institutional investors have soured on local debt bond ETFs. Not only have the markets punished shareholders with nearly -10% in depreciation off the highs, but institutional money managers also appear to be running for the hills.
Consider the sobering “stats” from Tuesday’s session, September 27. Block trade “selling on strength” revealed that money managers dumped $200 million of WisdomTree Emerging Market Local Debt (ELD) on 11x the normal volume, erasing 15% of ELD’s assets under management. Similarly, money managers dismissed $220 million of WisdomTree Asia Local Debt (ALD) on 33x normal volume, eradicating 34% of ALD’s total asset base.
33x the normal volume? 34% asset-under-management wipeout? Anyone who believes that contagion fears are approaching containment isn’t paying attention to the exodus from emerging market bonds.
Perhaps ironically, I have not returned to developed world treasuries for years. What’s more, in complete contrast, I continue to embrace dollar-denominated emerging market debt like PowerShares Emerging Debt (PCY) as well as local currency debt (e.g., ALD, ELD). After all, even global recession forecasters would agree that emerging market central banks have ample room to cut rates.
It follows that a significant slowdown in economic growth may benefit emerging market bonds. EM central banks could lower rates, effectively boosting the price on a number of EM Bond ETFs.
Of course, if the entire globe becomes infected by the eurozone virus, all “bets” would be off. In fact, under that scenario, even gold bugs could get squashed.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.