While the markets reacted positively to Wednesday’s non-action by the Federal Reserve (the “Fed”), there are a number of reasons for investors to remain cautious, according to Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors® ETFs.
“I believe there are two ways to interpret yesterday’s announcement by the Fed,” said Rodilosso. “First, one could take Chairman Bernanke at his word and accept that the Fed has modified its views on U.S. economic growth, having seen unanticipated tightness in the lending markets since originally suggesting that tapering was on the horizon in the spring.”
“Second,” he added, “one could arrive at the conclusion that the Fed would have announced it was ready to begin tapering purchases if it had a good handle on the consequences of doing so, both for financial markets and for the overall economy.”
“Neither theory provides much encouragement in my view, even if yesterday’s announcement left the markets positively giddy,” he continued. “If theory number one is true, then I believe Quantitative Easing has not worked that well, the economy is still quite fragile, and prospects for returns on financial assets in real terms are therefore less attractive. If theory number two is true, then I believe the Fed is merely postponing a presumably negative event and is doing so because it has engaged in an experimental policy from which it is not quite sure how to exit.”
Rodilosso noted the existence of a counter-argument to these views that would point to the assumption that tapering will begin only when the economy is considerably stronger and will therefore be able to sustain itself even amid potential tighter liquidity. “What that argument misses, however,” he added, “is that tapering does not remove a highly accommodative policy, it only makes existing policies somewhat less highly accommodative. In my opinion, the Fed’s views on future rate hikes give strong confirmation that easy money is a given into 2015.”
He concluded suggesting that, “The near-term euphoria around the idea of the punch bowl being replenished, rather than taken away, may ultimately lead to a much more severe hangover.”
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Mr. Rodilosso oversees Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHY), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL®), International High Yield Bond ETF (NYSE Arca: IHY®), LatAm Aggregate Bond ETF (NYSE Arca: BONO®) and Renminbi Bond ETF (NYSE Arca: CHLC®). As of June 30, 2013, the total assets for these ETFs amounted to approximately $1.9 billion.
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 $21.8 billion in assets under management, making it the seventh largest ETP family in the U.S. and tenth largest worldwide as of June 30, 2013.
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. Some Funds are 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; hedging risk; and short sale risk. Investors should be willing to accept a high degree of volatility and the potential of significant loss. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. For a more complete description of these and other risks, please refer to the Funds’ prospectus and summary prospectus.
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