Ray Hendon

A Peek Under the Wisdom Tree

Thanks for your comments, Brian. You do have a good point about the potential relationship between hot money and its effects on currency prices, but I am not signing on to the scenario you outline about inflows and interest rates. I think there are some flaws in the plan, but I'm not going to make a counter-argument now. It would take a lot of space and time, but this is something we might revisit at another time.

I will make one note, however. I think the most important variable in predicting the interest rate effect is not the relative rate of interest, i.e., high or low, but the direction of expected change. If interest rates are expected to rise and do, this would devastate longer-term bond prices, regardless of where they start from. It would, of course, help bond prices if they were expected to fall and did, in fact. fall.

Also, emerging markets do not support a sufficiently liquid high-quality credit market, so all of the ETFs that specialize in this segment of the market use forward contracts as their primary assets, and they depend on the roll for their interest earnings. You can only extend this out so far, and contracting with an exceptionally long roll period places a huge burden on the fund's net asset value. What if thery're wrong? I don't know of any that want to take on this type of risk.

You might consider contacting your local WisdomTree rep with your suggestion about venturing out the yield curve. From what I have learned from Mr. Lavine and from his counterpart at Barclays, they listen to their advisors clients. You might start a revolution in the business. (:~)

Thanks again for your input.

Best wishes,
Ray