Van Eck Blogs http://www.vaneck.com/Templates/PageLayout_Special_rwd.aspx?pageid=12884903011?blogid=2147483856 Insightful, Weekly Commentary on the Municipal Bond Markets 2016-07-01 en-US China A-Shares Denied MSCI Green Light http://www.vaneck.com/blogs/etfs/china-a-shares-fail-from-msci-june-2016/ On June 14, in a surprise decision to many investors, MSCI again denied mainland Chinese equities (China A-shares) a seat at the global indexing table, excluding A-shares from its benchmark MSCI Emerging Markets Index.

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Van Eck Blogs 6/30/2016 12:00:00 AM

Authored by James Duffy, Product Manager, VanEck Vectors ETFs

On Tuesday, June 14, MSCI, the world's largest indexing firm, once again refused China A-shares a seat at the global indexing table ( read MSCI's press release). With its decision, MSCI sent a clear message that it believes that Chinese A-shares still do not offer investors enough accessibility, liquidity, and transparent ownership to be included in the MSCI Emerging Markets Index.

The result is that China, currently the second largest economy, is still being viewed by some as a regional rather than a global equity player. While this was a blow to Chinese regulators, international markets did not react significantly to the decision. What is at stake? Given that nearly $1.5 trillion in global assets currently track the MSCI Emerging Markets Index, including China A-shares in the Index could potentially funnel billions of dollars into the mainland Chinese stocks.

China's Measures for Inclusion Fall Short

The outcome of MSCI's decision came as a surprise to many. For the past year, the Chinese Securities Regulatory Commission (CSRC) has been working with MSCI decision makers to achieve inclusion of China A-shares in the Index. Although positive developments have been made toward opening China's capital markets, they may not have been enough for this round.

According to MSCI, its decision was largely driven by feedback received from market participants during MSCI's consultation period. MSCI officials had identified critical issues that needed to be addressed by the Chinese regulators for inclusion in the Index, including clarification on beneficial ownership of investments, further liberalization of the quota allocation process and capital mobility restrictions, voluntary stock suspensions, and pre-approval requirements by the Shanghai and Shenzhen stock exchanges, in MSCI's view.

Chinese Regulators Make Progress

The general consensus is that while progress has been made by Chinese regulators, these changes either fall short of what is needed or that participants will need more time to assess the effectiveness of the changes. MSCI did leave open the possibility of adding A-shares outside of its regular review cycle, but only if significant changes were made. MSCI also stressed that if and/or when an inclusion of China A-shares is announced, implementation would not occur for at least 12 months. However, given that "additional time needed to assess the effectiveness" has been cited multiple times as part of the feedback, we believe that an off-cycle addition is unlikely.

Looking ahead, this may mean that it could take until June 2018 at the earliest for A-shares to be included, even partially, in the MSCI Emerging Markets Index. As MSCI has stated consistently, the process is likely to happen gradually, with the first step reflecting a partial 5% A-shares inclusion as shown in the pie charts below.

MSCI Emerging Markets Index
Country Weights - Actual

Source: MSCI, as of June 10, 2016.
MSCI Emerging Markets Index
Country Weights - Hypothetical
Partial (5%) A-Shares Inclusion
Source: MSCI, as of June 10, 2016.
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Munis: Expect More from Your Munis http://www.vaneck.com/blogs/muni-nation/expect-more-from-munis-june-2016/ At VanEck, we believe investors should expect more from their municipal investments. Our suite of municipal bond ETFs was built precisely with this in mind.

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Van Eck Blogs 6/23/2016 12:00:00 AM Municipal bond performance has been impressive year-to-date in 2016. Muni bonds have provided a haven from the volatility in the general stock market. In addition to recent performance, we'd like to note that the municipal bond market also offers a diverse set of individual opportunities that may appeal to investors looking for more customized exposure.

At VanEck, we believe investors should expect more from their municipal investments. Our suite of municipal bond ETFs was built precisely with this in mind. The graph below shows the striking range of opportunities the suite offers – from short-duration to high credit quality, and from long-duration to high-yield.

Our innovative suite of seven municipal income ETFs offers investors the ability to exercise control over their portfolio yield, duration, and credit exposure at different points in the interest rate cycle.

VanEck Municipal Income ETFs by Yield and Duration
as of June 20, 2016


Click here for standardized performance and performance current to the most recent month-end.
Source: VanEck Research. As of June 20, 2016. The performance data quoted is past performance which is no guarantee of future results and current performance may be lower or higher than the performance quoted. Investment returns and ETF share values will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Performance current to the most recent month end is available by calling 800.826.2333 or by visiting vaneck.com/etfs. Modified Duration measures a bond's sensitivity to interest rate changes that reflects the change in a bond's price given a change in yield. 30-Day SEC Yield is a standard calculation developed by the Securities and Exchange Commission that allows for fairer comparisons among bond funds. It is based on the most recent 30-day period. This yield figure reflects the interest earned during the period after deducting a Fund's expenses for the period. In the absence of expense waivers or reimbursements, the 30-Day SEC Yield for XMPT would have been 4.71%.

Yield Curve-Focused

Our investment grade, AMT-free, municipal ETF product offerings seek to track indices that reflect a unique segmentation of the municipal yield curve: Short (years 1-6: AMT-Free Short Municipal Index ETF - SMB); Intermediate (years 6-17: AMT-Free Intermediate Municipal Index ETF - ITM); and Long (years 17-30: AMT-Free Long Municipal Index ETF - MLN). These indices have maturity segments that are longer than those traditionally used by some asset managers. We believe this may allow investors to maximize the potential yield available in each part of the yield curve.

Credit-Focused

Our credit-focused municipal ETF product offerings seek to track indices that include both the highest credit quality available in the municipal asset class (pre-refunded: Pre-Refunded Municipal Bond ETF - PRB) and municipal high yield – short (years 1-12: Short High-Yield Municipal Index ETF - SHYD) and all maturity (years 1-30+: High-Yield Municipal Index ETF - HYD). The high yield indices include an investment grade component to help enhance liquidity.

Smart Beta

Our smart beta municipal ETF (CEF Municipal Income ETF - XMPT) seeks to track an index that includes closed-end funds that hold municipal bonds (CEFs).

We believe that, with their yield curve, credit and smart beta focuses, our suite of municipal income ETFs provide investors with a way to access the potential opportunities within municipal fixed income and to "get" more from their munis.

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Attractive Yields and Value in High Yield Emerging Markets Bonds http://www.vaneck.com/blogs/etfs/attractive-yields-value-high-yield-emerging-markets-bonds-june-2016/ High yield emerging markets corporate bonds have had a strong start to 2016. They offer unique benefits to investors and can provide an income-producing complement to an investment in emerging markets equities.

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Van Eck Blogs 6/22/2016 12:00:00 AM

Authored by William Sokol, Product Manager, ETFs

Strong Relative Performance

High yield emerging markets corporate bonds have had a strong start to the year, outperforming emerging markets equities with a 7.75% year-to-date return at the end of May.

Longer term, the asset class has returned on average 7.40% per annum over the past 10 years (for the period ending 5/31/2016), outperforming both U.S. high yield corporates and emerging markets equities. Given this attractive long-term performance, it's worth taking a closer look at the potential value that this asset class can provide.

Performance Comparison: Average Annual Total Returns as of 5/31/2016

Asset Class YTD % 1 YR % 3 YR % 5 YR % 10 YR %
HY Emerging Markets Corporate Bonds 7.75 2.33 3.07 4.72 7.40
HY U.S. Corporate Bonds 8.15 -0.92 2.89 5.26 7.28
Emerging Markets Equity 2.32 -17.63 -4.95 -4.83 3.11
Source: Morningstar and Bloomberg; see definitions below. Past performance is not a guarantee of future results. Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. HYEM performance current to the most recent month end is available here.

Attractive Characteristics

The high yield emerging markets bond sector, as measured by the BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index, has grown tremendously in the past 10 years, from a market value of $33 billion in 2006 to approximately $346 billion today. Although emerging markets corporate issuers may issue bonds denominated in local currencies, the vast majority of high yield emerging markets bonds are U.S. dollar denominated (and are the focus here), which significantly reduces the currency risk to U.S. investors.

At the end of May, the sector was yielding 8.42%. That was approximately 1% more than U.S. high yield (7.43%), while also having a lower duration (3.80 versus 4.33), a higher average credit rating, and a historically lower average default rate.

Why Higher Yields?

Emerging markets corporate issuers have traditionally had to pay more for financing versus their similarly rated U.S. market counterparts due to the additional risks generally associated with emerging markets investing. For example, the average spread of BB rated emerging markets bonds was 58 basis points higher than those of U.S. bonds falling into the same ratings bucket, as of May 31, 2016. For B rated bonds, that spread differential was nearly 200 basis points.

High Yield Emerging Markets Bonds Provide Higher Spreads Per Rating Versus U.S. High Yield (as of 5/31/16)

Source: BofA Merrill Lynch.

Hidden Value

Certain emerging markets corporate issuers may have credit ratings that reflect higher risk profiles than their corporate fundamentals alone would suggest, and pay higher yields than similar issuers based in developed markets. Why? Because a local sovereign credit rating can be a significant determinant of the credit rating on a corporate issuer's foreign currency bonds. The risk that a national government may impose restrictions limiting an issuer's ability to convert local currency into foreign currency to fulfill its external debt obligations is taken into account by rating agencies. This risk is generally higher for emerging markets countries, and therefore this "rating ceiling" can have a meaningful impact on an emerging markets corporate issuer's credit rating. This can create value for investors, who can potentially earn a higher yield relative to the underlying corporate risk they are taking.

The yield provided by high yield emerging markets bonds reflects both the potential risks and the value that the asset class can provide. High yield emerging markets bonds can provide an income-producing complement to an investment in emerging markets equities, and can also provide issuer and regional diversification alongside a domestic high yield allocation.

High yield emerging markets bonds can be accessed through VanEck VectorsTM Emerging Markets High Yield Bond ETF (HYEM).

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Vietnam: An Important Asia-Pacific Player http://www.vaneck.com/blogs/etfs/vietnam-important-asia-pacific-player/ The importance of Vietnam has not been lost on President Barack Obama…. Over the past decade, Vietnam has become an increasingly significant player in the Asia-Pacific region.

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Van Eck Blogs 6/17/2016 12:00:00 AM

Authored by James Duffy, Product Manager, VanEck Vectors ETFs

The importance of Vietnam has not been lost on President Barack Obama. With his three-day mission in late May, Obama represented only the third U.S. president to visit Vietnam since the end of U.S. involvement in 1973. (Presidents William Clinton and George W. Bush visited exactly six years apart in November 2000 and 2006, respectively.)

Obama's goal of upgrading U.S.-Vietnamese relations reflects a desire to geopolitically offset China's growing strength in the region, and to tap into an emerging power whose rapidly expanding middle class could help expand the market for U.S. goods.

Possible Counterbalance to China

Over the past decade, Vietnam has become an increasingly significant player in the Asia-Pacific region. Vietnam potentially serves an important counterbalance to proximate Chinese territorial claims, particularly in the South China Sea. This may be the primary reason why President Obama lifted the U.S. embargo on the sale of military equipment to the country on May 23.

Vietnam's economy has experienced significant growth, with the country's annual GDP growth rate averaging 6.49%1 from 2000 to 2015. On a quarterly basis, it reached an all-time high of 8.46% in the fourth quarter of 2007. And a record low of 3.14% in the first quarter of 2009.2

Growing Economy Targets Services and Industry

The Vietnamese government is firmly focused on fostering economic growth. In April, Vietnam's National Assembly agreed upon an ambitious five-year socio-economic development plan taking it up to 2020,3 despite a recent drought and a fall-off in first quarter GDP. One of the nine economic indicators to be assigned a target for 2020 was the contribution to GDP from the industry and services sectors. Accounting for 68% of GDP in 2015 (services at 40% and industry at 28%), the target for 2020 is a combined total of 80%.4

Culture of Business Entrepreneurship

Vietnam boasts a very young population, with 41% under 25-years old.5 Much of the country's future growth will likely need to come from successful business entrepreneurship. Although the Vietnamese are already well known for their entrepreneurship, the success rate for new enterprises will need to be greatly improved. For example, in Q1'16, although more than 23,000 new businesses were started, 22,000 companies either suspended operations or went bankrupt.6

The Vietnam stock market has experienced growth from 2007-2015, as seen in the below chart. This trend may continue as the Ministry of Finance is seeking to reduce costs for investors and provide access to capital for aspiring companies7 by combining the small-cap-oriented Hanoi stock exchange with its larger sibling based in Ho Chi Minh City.8

Vietnam Stock Market Capitalization
2007-2015

Source: Bloomberg.

The Vietnam market can be accessed through VanEck VectorsTM Vietnam ETF (VNM), the first U.S.-listed ETF focused exclusively on Vietnam and provides investors a convenient way to customize their international exposure.

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May Acquisitions Help U.S. Moats http://www.vaneck.com/blogs/moat-investing/may-acquisitions-help-us-moats-june-2016/ Strong relative performance in May helped U.S. moat-rated companies continued to impress in 2016. M&A activity and the strong showing of healthcare companies were key themes.

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Van Eck Blogs 6/16/2016 12:00:00 AM

For the Month Ending May 31, 2016

Performance Overview

U.S. moat-rated companies continued to impress in 2016 with another strong relative performance month in May. The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) topped the S&P 500® Index (2.69% vs. 1.80%) for the month and maintained its relative performance year-to-date (15.07% vs. 3.57%). By contrast international moats fared less well in May with the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) lagging the MSCI All Country World Index ex USA (-2.09% vs. -1.69%).

U.S. Domestic Moats: May M&A

News of Bayer's (BAYN GR) bid to buy wide moat agrichemical giant Monsanto Company (MON US) boosted shares of MON US late in the month. This came on the heels of Abbott Laboratories' (ABT US) announcement of its intent to buy wide moat St. Jude Medical (STJ US) which propelled the stock performance of STJ US in April. Healthcare companies continued their strong performance for MWMFTR in May led by McKesson Corp (MCK US) and Allergan (AGN US). The industrials sector was the leading detractor for the month with notable poor performance from rail companies CSX Corp (CSX US) and Norfolk Southern Corp (NSC US).

International Moats: Financials in Flux

As with U.S. moats in May, internationally focused MGEUMFUN's exposure to healthcare companies helped boost performance. However, the Index was unable to overcome the negative performance contributions from industrials and financials companies, ending the month down 2.09%. Canadian banks struggled in May as many have been forced to deal with credit losses related to the oil & gas industry. Overall, construction firm China State Construction International Holdings Limited was the poorest Index performer in May.

Special Update: Morningstar Index Enhancements

As previously announced, Morningstar will implement enhancements to the index methodology for MWMFTR and MGEUMFUN effective June 20, 2016. The indices will continue to be built on Morningstar's equity research which identifies sustainable competitive advantages at attractive valuations, but will aim to reduce turnover, broaden diversification, and mitigate unintended sector concentration.

Read more about Morningstar's index methodology enhancements »



(%) Month Ending 5/31/16

Domestic Equity Markets

International Equity Markets

(%) Month Ending 5/31/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
Monsanto Company
MON US
20.06
McKesson Corporation
MCK US
9.13
LinkedIn Corporation Class A
LNKD US
8.93
Allergan plc
AGN US
8.86
Biogen Inc.
BIIB US 5.36

Bottom 5 Index Performers
Constituent Ticker Total Return
MasterCard Incorporated Class A
MA US
-1.12
Gilead Sciences, Inc.
GILD US
-1.30
CSX Corporation
CSX US
-2.40
Walt Disney Company
DIS US
-3.91
Norfolk Southern Corporation
NSC US
-6.09

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
Elekta AB Class B EKTAB SS 7.57
Henderson Group plc HGG LN 7.36
Sands China Ltd. 1928 HK 7.04
Lloyds Banking Group plc LLOY LN 6.69
KBC Groupe SA KBC BB 5.48

Bottom 5 Index Performers
Constituent Ticker Total Return
Centrica plc CNA LN -11.52
Compagnie Financiere Richemont SA CFR VX -11.52
IOOF Holdings Ltd IFL AU -12.40
Embraer S.A. EMBR3 BZ -12.44
China State Construction International Holdings Limited 3311 HK -18.02

View MOTI's current constituents

As of 3/18/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Jones Lang Lasalle Inc JLL US
Allergan plc AGN US
State Street Corp STT US
Visa Inc A V US
Gilead Sciences Inc GILD US
CBRE Group Inc. CBG US
Express Scripts Holding Co. ESRX US
Amgen Inc AMGN US
Mastercard Inc A MA US
Walt Disney Co DIS US
McKesson Corp MCK US
The Bank of New York Mellon Corp BK US
LinkedIn Corp LNKD US
US Bancorp USB US
St Jude Medical Inc STJ US
Norfolk Southern Corp NSC US

Index Deletions
Deleted Constituent Ticker
Polaris Industries, Inc PII US
Twenty-First Century Fox Inc A FOXA US
Harley-Davidson, Inc HOG US
Vf Corp VFC US
Time Warner, Inc TWX US
Berkshire Hathaway Inc B BRK/B US
Western Union Co WU US
American Express Company AXP US
Kansas City Southern, Inc KSU US
Union Pacific Corp UNP US
Emerson Electric Company EMR US
United Technologies Corp UTX US
Spectra Energy Corp SE US
Wal-Mart Stores, Inc WMT US
Intl Business Machines Corp IBM US
Qualcomm, Inc QCOM US

View Latest MOAT Reconstitution Report
View MOAT's list of current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Index Additions
Added Constituent Country
Cameco Corp Canada
National Bank of Canada Canada
Swatch Group AG Switzerland
Genting Singapore Plc Singapore
KBC Group NV Belgium
Embraer S.A. Brazil
BNP Paribas France
UBS Group AG Switzerland
Centrica United Kingdom
Novartis AG Switzerland
Richemont, Cie Financiere Switzerland
CapitaLand Commercial Trust Singapore
Roche Hldgs AG Ptg Genus Switzerland
Swire Properties Ltd Hong Kong
Bank of Nova Scotia Halifax Canada
Julius Baer Group Switzerland
Ioof Hldgs Ltd Australia
Grifols SA Spain
Contact Energy Ltd New Zealand
Mobile TeleSystems PJSC Russian Federation
China State Construction International Holdings Ltd. China
Henderson Group Plc United Kingdom
Teva Pharmaceutical Industries Israel
Sands China Ltd. Hong Kong

Index Deletions
Deleted Constituent Country
National Australia Bank Ltd Australia
Goodman Group Australia
Spotless Group Holdings Ltd Australia
Qube Holdings Ltd Australia
Banco Santander Chile Chile
Empresa Nacional De Electricidad Sa Chile
Agricultural Bank Of China Ltd China
Bank Of China Ltd China
Industrial And Commercial Bank Of China Ltd China
Beijing Enterprises Holdings Ltd. China
Banco Bilbao Vizcaya Argentaria Sa Spain
Svenska Handelsbanken Sweden
Nordea Ab Sweden
Power Financial Corp Canada
Power Corp Of Canada Canada
Enbridge Inc Canada
Capitaland Mall Trust Reit Singapore
Wharf (Holdings) Ltd. Hong Kong
Ambuja Cements Ltd India
Itc Ltd India
Sun Pharma Industries Ltd India
Linde Ag Germany
Numericable Group France
Kering France

View Latest MOTI Reconstitution Report
View MOTI's list of current constituents



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Steel: U.S. Strong Despite Global Oversupply http://www.vaneck.com/blogs/natural-resources/steel-us-strong-despite-global-oversupply-june-2016/ Although the global steel industry may be in a slump, the U.S steel industry shows strong promise and has performed well thus far in 2016. Senior Analyst Charl Malan explores why.

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Van Eck Blogs 6/14/2016 12:00:00 AM

Overview: The U.S. steel industry has been a developing, positive theme in 2016. Steel impacts the industrial metals components of VanEck's actively and passively managed natural resources strategies. As of March 31, 2016, steel-related companies accounted for approximately $250 million of the firm's assets under management.

The global steel industry is oversupplied and is facing significant headwinds. 2015 was arguably a turbulent year for the industry, given these major negatives: China's economic slowdown, falling prices, and a glut of foreign steel imports into the U.S. (mainly from China).

Despite the negative view for the global steel industry, we believe that the U.S. steel industry has bottomed and unique investment opportunities exist. Thus far in 2016, the U.S. steel industry has performed well, and, we believe, there are further compelling upside opportunities. In short, we see these positive signs: (1) a continuation of a strengthening U.S steel price environment (Chart A); (2) fundamentally better operating and financial conditions via improved capacity utilization (Chart B); and (3) the potential for an industry-wide multiple rerating, which has not occurred in a long time.

Chart A: U.S. Steel Prices Rebound in 2016 ($/ton)

U.S. Steel Prices Show Rebound in 2016 Source: CRU, Morgan Stanley Research. HRC represents "hot rolled coil"; CRC is "cold rolled coil"; and HDG is "hot dipped galvanized steel." All represent types of steel. Data as of 4/30/2016.

Chart B: U.S. Steel Industry Operating Conditions/Rates (% Capacity Utilization)

U.S. Steel Industry Operating Conditions/Rates Source: AISI, Morgan Stanley. Capacity utilization is a metric used to measure the rate at which potential output levels are being met or used; this chart demonstrates improvement thus far in 2016. Data as of 4/30/2016.

Flood of Supply from China

The global steel industry is oversupplied, with about 33% idle spare capacity. During the period from 2012 to 2015, global steel production increased from 1,554 million metric tons (mmt) per annum to 1,667 mmt per annum, a 113 mmt (or 7.3%) jump, of which 94 mmt came from new capacity in China.

The magnitude of this increase in global supply is best understood when stacked against demand. The U.S. is the world's third largest consumer of steel, with a 120 mmt to 130 mmt per annum market, while the European Union is the second largest market at 140 mmt to 150 mmt per annum. (China is both the world's largest consumer and producer.)

China's Overcapacity Problem

China's demand for steel began to wane just at the time that the country began aggressively increasing its domestic production. The net result was that steel once destined for the Chinese domestic market found its way onto the export market with Chinese exports increasing from 42 mmt per annum in 2012 to 100 mmt per annum in 2015 (see Chart C).

Chart C: China's Net Steel Exports

China's Net Steel Exports Source: VanEck, Bloomberg. Data as of 4/30/2016.

Predictably, the increase in Chinese steel export volumes depressed international steel export prices. This placed significant price pressure on domestic steel prices in countries that are large importers of steel, such as the U.S.

U.S. Steel Prices' 2015 Collapse

At the end of 2015, steel (hot rolled coil) exports from China traded at $250/ton and imports into the U.S. reached record highs of 30% of demand, compared with a more normalized level of 18% to 20%. With cheaper imported steel flooding the U.S. market, domestic prices collapsed from $480/ton to around $370/ton (-23%) between July 2015 and January 2016.

These low prices (last seen during the 2008/2009 global financial crisis) threw the U.S. steel industry into a crisis of reduced orders, idle mills, and significant layoffs. To protect itself, the industry turned to trade protection measures to help combat low-priced imports. The Leveling the Playing Field Act, passed in 2015, seeks to maintain a fair marketplace for U.S. steelmakers as it restores and strengthens anti-dumping rules and countervailing duties.

As a result, in March 2016 the U.S. Department of Commerce announced that both government subsidies and dumping were occurring and accordingly levied tariffs in the range of 282% to 493%. These are more than enough to lock out Chinese steel from the U.S. market.

Upside Potential for U.S. Steel Prices

Looking out post the implementation of these policies, we expect current U.S. domestic steel prices to have additional upside. We believe that the price of domestic steel could improve because: (1) the removal of "dumped and government subsidized" steel from the domestic market will normalize the mix between domestic supply and imports; (2) inventories will be drawn down; and (3) upward pressure on raw material prices, such as coking coal and iron ore, will continue.

However, looking ahead to 2017, we do expect the market to soften as higher prices translate into increased supply either from the U.S. domestic market (U.S. steel utilization rate is around 74%) or from increased imports. Finally, the strong automotive and non-residential markets alone are not sufficient to offset a potential increase in U.S domestic supply and so a resurgence in demand from other industries, such as the energy industry, will be required.

Trade Protection Taking Shape

In conclusion, although the U.S steel industry has performed well to date in 2016, we believe the opportunity has more near-term upside potential as the enforcement of all trade protection laws is still in its early stages. As authorities eventually implement these policies for steel, it would not be surprising to see additional trade protection announcements being made covering other key U.S. commodities.


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Setting the Stage for the Next Gold Bull Market http://www.vaneck.com/blogs/gold-and-precious-metals/setting-stage-next-bull-market-june-2016/ Gold markets fluctuated in May on changing U.S. interest rate expectations, and both gold bullion and gold shares suffered. The Fed's less aggressive stance on rates may help gold remain above $1,200 per ounce.

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Van Eck Blogs 6/13/2016 12:00:00 AM

For the month ending May 31, 2016

The gold market moved to the beat of the Federal Reserve's (the "Fed") rate hike signal drumming in May. At the beginning of the month, the probabilities of a rate increase, as implied by the federal funds futures markets1, were 12% for an increase in June and 26% for a July increase. That dropped to 4% for June and 19% for July by May 16. On May 18, the market interpreted the minutes from the Federal Open Market Committee (the "FOMC") April meeting as being more hawkish than anticipated and market expectations of rate increases in June and July jumped to 32% and 47%, respectively. Gold traded down for nine consecutive sessions following the release of the FOMC's minutes. Gold dropped to an intra-day low of $1,199 per ounce on May 30, and ended the month at $1,215 per ounce for a loss of 6.0% or $77.66.

U.S. Economic Data Mixed

The U.S. dollar, which historically has a strong negative correlation2 with the gold price, also reflected the market's assessment of a rate hike this summer, with the U.S. Dollar Index (DXY)3 ending May up 3% for the month. The change in market sentiment regarding upcoming Fed rate decisions was primarily driven by comments from Fed Chair Janet Yellen and other Fed officials. Meanwhile, U.S. economic data releases continued to be mixed, and, in our view, do not paint a clear picture of the U.S. economy that would favor further tightening in the near term. Positive April economic data included retail sales and existing and new home sales coming in above expectations, and an increase in the ISM Manufacturing Index4 reading for May that was widely expected to be declining. In contrast, employment data and construction spending were below expectations while the University of Michigan Sentiment Index5, Consumer Confidence Index6, and manufacturing activity in Chicago and Dallas for May were all weaker than expected.

Disappointing May Jobs Report the Most Impactful

But the most impactful, in our opinion, economic data was the May jobs report announced by the U.S. Department of Labor on June 3. Reported figures were massively below expectations, showing the lowest number of workers added in six years. While market chatter before the report's release may have suggested the Fed had everyone convinced of a summer hike, a hike was not priced in for June, as evidenced by the 20% implied probability. The chance of a July hike was only at 53.6%. Immediately after the jobs report, those probabilities dropped to 4% and 29% respectively, the DXY Index fell (down 1.7%) and gold rallied (up 2.8% or $33 per ounce), closing at $1,244 per ounce on June 3.

With gold falling in May, gold stocks underperformed. The NYSE Arca Gold Miners Index (GDMNTR)7 fell 11.9%, and the MVIS Global Junior Gold Miners Index (MVGDXJTR)8 dropped 11.5% during the month, trimming gains for the year to 65% and 76% respectively, as of May 31, compared to gold's gain of 14.5%.

Gold ETPs Have Increased 27% in 2016

Of note, the amount of gold held by global gold bullion exchange traded products (ETPs) increased by an additional 4.8% during the month of May. Holdings of global gold ETPs have increased almost 27% this year to an estimated 59.5 million ounces of gold, still well below the 2012 peak of more than 84 million ounces.

We have been of the opinion that the Fed may not be as aggressive as previously guided, and that rising rates in 2016 could be a significant impediment to the U.S. economy. The June 3 jobs report missed expectations by a wide margin. In May, the U.S. added just 38,000 workers, compared to the median of 160,000 as forecasted by Bloomberg. Job gains for prior months were downgraded as well. This indicates a weakening labor market and reduces the odds of Fed rate increases in the coming months.

Gold Entering Early Stages of a New Bull Market

We believe this is another important inflection point for gold that suggests the early stages of a new bull market. The gold price has been consolidating in the $1,200 to $1,300 per ounce range since early March, hitting a low of nearly $1,200 per ounce on May 30. It now appears as if gold is poised to remain above the technically and psychologically important $1,200 per ounce level. While it is not uncommon for the gold price to struggle in the summer months, we believe gold is forming a new base. We expect to see higher gold prices as the year progresses.

Gold Price Monthly Return Average, 1971-2015 and 2016

Gold Price Monthly Return AverageSource: Bloomberg, Scotiabank GBM

Gold Companies Transitioning with Higher Cash Flows

We met the management of approximately 20 gold companies during the month, which allowed us to get a good sense of what's happening in the sector. The main takeaway is that while companies are still focused on efficiencies, cost savings, and operating improvements to help maximize cash flow, higher gold prices this year have shaped the conversation around what to do with these new cash levels.

For some companies, paying down debt still remains a priority. For firms currently building new mines, the higher cash flows provide a welcome cushion and remove market concerns over financing. Many companies also expect dividends to resume and/or increase as free cash flow grows. But for most companies, higher cash flows, at a time when balance sheets are in good shape and costs are under control, will likely bring back the opportunity to add future growth.

Companies Shifting Focus Toward Growth and Profitability

Valuations are still relatively low, so there is opportunity to buy assets. Exploration spending, which had been significantly reduced over the last couple of years, should also pick up again, allowing companies to add resources and reserves and increasing their chances of making new discoveries. Projects that have been shelved will be revisited as financing becomes available. We met with management teams that, despite the higher gold price and increased cash flows that come with it, remain firmly committed to growing profitability and returns rather than production. We heard more than once in our discussions that a new ounce of production is only good and will only be added if it improves or maintains the existing per ounce profitability of the company. Companies are measuring growth in free cash flow per share, for example, rather than production volumes.

This is very encouraging to us. Company initiatives have slowly and cautiously started to shift from mere survival to thriving. "Caution" is the key word here. As they embark on what may be the next gold bull market, we believe gold companies need to continue to demonstrate a rigorous capital allocation strategy that focuses on value creation for shareholders and positions the gold mining equity sector in the investable universe of the broader market.

Download Commentary PDF with Fund specific information and performance »


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MSCI to China: Let Us In and We'll Let You In http://www.vaneck.com/blogs/etfs/msci-china-let-us-in-well-let-you-in-june-2016/

Tomorrow MSCI will announce the results of their annual classification review and the highly anticipated decision on the inclusion of China A-shares within its flagship Emerging Markets Index. A decision to include A-shares would mark a major milestone for China's mainland equity markets.

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Van Eck Blogs 6/13/2016 12:00:00 AM

Authored by James Duffy, Product Manager, VanEck Vectors ETFs

Chinese regulators have realized that mainland equity markets need to be more accommodating, transparent, and, in the case of Morgan Stanley Capital International (MSCI), more open. Inclusion of China A-shares in MSCI's Emerging Markets Index, a benchmark with an estimated $1.5 trillion tracking it, may be pivotal in encouraging new investment in the country.

In 2014, MSCI first considered including China A-shares in its Emerging Market Index. At that time MSCI, in consultation with clients, opted not to include them, citing "remaining investability constraints linked to the Qualified Foreign Institutional Investment (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) quota systems".1

MSCI Collaborated with China to Foster Inclusion

In 2015, despite having made "substantial progress toward the opening of the Chinese equity market to institutional investors",2 MSCI felt there was additional liberalization that needed to take place. Once again, it chose not to include China. MSCI did, however, form a collaborative working group with the China Securities Regulatory Commission (CSRC) in the hopes of resolving the remaining issues.

Since the beginning of 2016, China has taken steps to meet MSCI's requirements for accessibility and transparency. In February, QFII quotas were increased from $1 billion to $5 billion and lock-up periods were shortened from one year to three months. This was followed more recently by rules restricting trading halts in stocks. Trading halts have been a major concern for MSCI and investors alike following the sharp selloff that began in the summer of 2015. Under the new rules, a stock can halt trading for up to three months for "major asset restructuring", and up to one month during "private placement".3

China Has Instituted Many Positive Changes

The changes made so far this year, along with the anticipated expansion of the Shanghai-Hong Kong Stock Connect program to include the Shenzhen Stock Exchange, have some investors speculating that this could be the year that China finally gets a spot in the MSCI Emerging Markets Index. In a recent report, Goldman Sachs estimated that there was a 70% likelihood that MSCI would add China A-shares to its flagship benchmark.4 Any inclusion of A-shares would likely be phased in over time with an initial allocation expected to be around 5%.5

As China transitions from a manufacturing-based economy to a services-based economy, being included in the premier emerging markets benchmark will likely be welcomed news to investors.

MSCI Emerging Markets Index - Country Weights
as of May 31, 2016

 

Source: MSCI.

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Munis: Supply Dynamics http://www.vaneck.com/blogs/muni-nation/supply-dynamics-june-2016/ Yields on municipal bonds have dropped and the muni yield curve has flattened. This has had a positive impact on performance. Why? Jim believes one reason may be lack of supply.

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Van Eck Blogs 6/9/2016 12:00:00 AM Muni yields have dropped and the yield curve has flattened. Why? One reason is lack of supply.

But why the lack of supply? Supply is commonly defined as new issuance to finance public purpose projects around the country. Issuance itself is subject to a number of factors, not least of which is predictable seasonality. Generally speaking, at the end of the second quarter issuance tends to intensify as municipalities approach their fiscal year ends, predominantly at the end of June. In July and August, there is a natural lull as people take vacations and the market receives less attention. Finally, in the last quarter of the year, the pace of issuance generally picks up again as bankers seek to book deals before the year ends.

But seasonality really only constitutes "noise" over the underlying supply "signal", and that signal remains weak. Since the global financial crisis and the subsequent recession, municipalities remain wary of increasing their citizens' tax burdens. Property values have been restated, leading to lower tax bases, with some companies relocating while others have gone out of business, resulting in lost jobs. Uncertain revenue streams have prevented expansion of capital programs at many local levels, hence this has resulted in far less supply than one might anticipate given what current low interest rates could support. Demand for munis, by contrast, has remained robust. We entered 2016 coming off the back of two strong years in 2014 and 2015, and investors comfortable with, if not reliant upon, steady income from the muni space. And in the face of persistent uncertainty in both the domestic U.S. and international markets, munis have continued to provide investors with low correlation to other asset classes, and strong credit quality, in addition to positive performance for the past three years according to the Barclays muni bond indices.1

This is clearly illustrated by muni fund flows versus issuance over the past three years, as well as year-to-date 2016.

Municipal Bond Fund Flows

Source: Morningstar. All muni mutual funds and ETFs as classified by Morningstar. As of 4/30/16.


Municipal Bond New Issuance

Source: MSRB. As of 4/30/16.

One way of addressing the supply issue, would be for Congress to launch a national infrastructure financing program akin to the Build America Bond (BAB) program launched by President Obama in February 2009 in the wake of the global financial crisis. Such a move would serve not only to provide much needed, and, in some cases vital, infrastructure improvement, but also, through fiscal policy, to take the onus for stimulating growth from the Federal Reserve alone. In addition, while sidestepping any need for municipalities themselves to raise taxes, it could, like BAB, have an immediate effect.

Post Specific Disclosures

1 As measured by the Barclays Municipal Bond Index and the Barclays High-Yield Municipal Bond Index. The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays High-Yield Municipal Bond Index is considered representative of the broad market for below investment grade, tax-exempt bonds with a maturity of at least one year.

Correlation, in the world of finance, is a statistical measure of how two securities move in relation to each other.

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Spring Takeover Bids a Boon http://www.vaneck.com/blogs/moat-investing/spring-takeover-bids-boon-june-2016/ Strategic mergers and acquisitions (M&A) can be attractive investment themes for moat companies, and this spring the Morningstar® Wide Moat Focus Index (MWMFTR) has seen a flurry of activity from the healthcare sector.

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Van Eck Blogs 6/8/2016 12:00:00 AM

Stock selection, a cornerstone of the moat investment philosophy, has driven much of the recent success of the Morningstar® Wide Moat Focus IndexSM (MWMFTR), which has gained over 15% YTD as of May 31, 2016. Of late, consolidation has been king and we've seen increased M&A activity.

M&A Activity Can Strengthen Moats

The concept of an economic moat refers to how likely a company is to keep competitors at bay for an extended period of time. Simply put, moat investing comes down to identifying companies that are able to stay one step ahead of the competition. Economic moats are often part of the strategic rationale for M&A transactions and post-acquisition success can be an important factor in moat ratings.

Strategic M&A can be attractive investment themes for moat companies — not only potential takeover targets but possible acquirers as well. Bolstered future return on capital and increased market share have the potential to strengthen these companies' economic moats and highlights the derived value from their acquisition strategies.

M&A Deals in the Works

M&A in general has been a prevalent theme in MWMFTR this spring. In April, Abbott Laboratories (ABT US) announced its intent to acquire St. Jude Medical, Inc. (STJ US) for $25 million, positioning the two to capture a larger market share position within the cardiovascular device market. The deal is expected to close in the coming fourth quarter. St. Jude was first added to MWMFTR on March 21, 2016. It was the big winner among domestic moat-rated companies for the month of April. (Read more on April's results in A Star Spangled April for Moats.)

In another announcement, German chemical and pharmaceutical company Bayer AG (BAYN DE), currently the number two crop chemical producer in the world, made an unsolicited takeover offer for Monsanto Company (MON US), the world's leading seed company. While currently facing a multitude of hurdles, the deal, if completed, would mark the largest-ever German takeover of a foreign company.1 A constituent in MWMFTR since it was added to the index on September 21, 2015, shares of MON soared immediately following reports of the buyout approach.

M&A doesn't always end in fist bumps and high fives, however. In April, U.S. drug maker Pfizer Inc. (PFE US) terminated its agreement to acquire Botox maker Allergan Plc (AGN US) on the heels of a new tax ruling by the U.S. Department of Treasury targeting its anticipated tax benefits. The announcement sent AGN US' price falling. However, investors will need to sit tight to see how AGN's $40.5 billion sale of its generic drug unit to Teva Pharmaceutical Industries Ltd (TEVA US) shakes out.

St Jude, Monsanto, and Allergan are all holdings of MWMFTR and VanEck Vectors Morningstar Wide Moat ETF (MOAT®). As of May 31, 2016, they represented 6.51%, 5.75%, and 3.69% of the Fund's net assets, respectively. Their pre- and post-deal-announcement fair values can be seen in the table below.

Click here for more details on MOAT holdings.

Morningstar Valuation Analysis

Acquisition Target Pre-Acquisition Announcement Fair Value Estimate Current Fair Value Estimate Proposed Acquisition Price per Share
St. Jude Medical $71 $85 $85
Monsanto Company $120 $120 $122
  Pfizer Merger Scenario Fair Value Estimate Standalone Fair Value Estimate Including Teva Acquisition
Allergan Plc $430 $370
Data as of May 20, 2016. Source: Morningstar.

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China’s “New Economy” Leshi Makes Vital Acquisition http://www.vaneck.com/blogs/etfs/chinas-new-economy-leshi-makes-vital-acquisition-june-2016/ Leshi is a great example of a company driving China's New Economy. Dubbed "the Netflix of China", Leshi plans to acquire Le Vision Pictures which will expand its business into film production and the "big screen".

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Van Eck Blogs 6/2/2016 12:00:00 AM

Authored by James Duffy, Product Manager, VanEck Vectors ETFs

Dubbed "the Netflix of China", Leshi Internet Information & Technology Corporation was the first online video firm to go public in China. On May 9, 2016, Leshi announced its plans to acquire Le Vision Pictures, which will help further expand its business into film production and the "big screen". Leshi is a great example of how the tech service industry is helping to drive China's New Economy (characterized by China's transition from an investment-driven to a consumer-led economy).

China's economic growth woes aside, its transition to the New Economy frames an opportunity for the country's consumer-led stocks. Companies like Leshi are capitalizing on potential opportunities both to gain market share and increase earnings. As shown in the chart below, New Economy companies listed on China's domestic A-share markets outperformed their old economy counterparts in 2015, experiencing an increase in earnings per share year-over-year.1

China's New Economy Outperforms Old Economy

Earnings Per Share for A-Share Companies with Reported 2015 Earnings (RMB Per Share)

China's New Economy Outperforms Old Economy

Source: Financial Times, as of March 29, 2016.

Leshi to Expand Offerings to Young Consumer Demographic

In a few short years, Leshi has grown from the first publicly listed online video provider to the second-largest company listed on Shenzhen's tech-friendly ChiNext board with a capitalization of Rmb109 billion.2 For the first quarter of 2016, Leshi declared a 117% rise in operating revenue year-over-year and a net profit increase of over 20% for the same time period.3

Leshi's deal to acquire 100% of Le Vision Pictures, its film production and distribution affiliate within parent LeEco, has the potential to greatly expand Leshi's reach both inside and outside of China. Currently engaged in mobile television and internet video production, the deal allows Leshi to supplement its online services with big screen film.

Le Vision Expands Leshi's Reach to Hollywood

Le Vision Pictures is one of the largest film production and distribution companies in China. With success financing and distributing Hollywood imports into China (such as The Expendables 2 & 3), the company is currently growing its presence in Hollywood. It recently partnered with Legendary East and Universal Pictures on The Great Wall, an upcoming American-Chinese fiction film starring Matt Damon and Andy Lau.4

With the acquisition of Le Vision Pictures, Leshi is positioned to further its foothold as a leading player in the online content market, one that will likely resonate with China's younger consumer demographic. Perhaps China's tech-forward service industry will continue to foster a growing number of startups that will help to stake its claim as New Economy China.

The new economy China market can be accessed through VanEck Vectors ChinaAMC SME-ChiNext ETF (CNXT). As of May 31, 2016, Leshi comprised 4.04% of (CNXT).


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Munis: Flattening Yield Curve Supports Performance http://www.vaneck.com/blogs/muni-nation/flattening-yield-curve-supports-performance-may-2016/

Jim explores how muni performance has been helped by the flattening yield curve, and explains why he views the municipal yield curve structure as a proxy for the overall market.

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Van Eck Blogs 5/25/2016 12:00:00 AM Most of you who have been readers of Muni Nation know that I often mention the muni yield curve and use it as a reference and a point of comparison to other asset classes to identify, and make clear, opportunities.

In and of itself, the yield curve represents the estimation now of what is anticipated to be a fair return for a bond of the highest credit quality, issued to mature in each successive year, to a standard final maturity of 30 years. There is both a subjective as well as an objective component imbedded in the creation of these annual rates, expressed as the yield curve. But, most importantly, the yield curve is used as a benchmark from which the value (spread) of other bonds of similar maturity, but different credit quality, is derived.

Interestingly, taken alone, the yield curve itself can change as the outlook for the economy morphs or, for example, when the Federal Reserve (Fed) forcibly adjusts the federal funds rate.

So, why this short academic exercise?

December 2015 was the last time the Fed raised rates, and in a Muni Nation post from last December, I discussed what we anticipate to happen in a rising rate scenario. Since that post, it is useful to note, as demonstrated by the graph below, that indeed the municipal bond curve has flattened between 1 and 30 years some 39 basis points despite no further Fed rate increases. The anticipatory nature of this change has helped to generate total returns of the Barclays Long Municipal Bond Index of 4.24% compared to the Barclays Municipal Bond Index of 2.80% year-to-date through May 20, predominantly due to the strength of demand for long bonds.

The municipal yield curve structure is itself a proxy for the overall market, reflecting changes in supply and demand as well as influences of economic activity and Fed policy. The curve has flattened and returns are positive. The only question is: What do the remaining 7 months hold in store for our muni portfolios? Much of this may depend on whether the Fed takes any rate action or not. Either way, we will be sure to revisit this at year end.

Muni Yield Curve Flattening January - May 2016 Helped Generate Positive Returns for Munis

Source: BofA Merrill Lynch.

Post Specific Disclosures

Yield to Worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.

The Barclays Long Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least 22 years or more. The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.

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Alternative Energy: A Transformative Storage Boom? Part 2. http://www.vaneck.com/blogs/natural-resources/transformative-storage-boom-part-2-may-2016/ Exploring the growing opportunities in solar alternative energy and the need for increased battery storage, as California leads the U.S. in what may become widespread adoption.

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Van Eck Blogs 5/24/2016 12:00:00 AM

Written by Veronica Zhang, this is part two of a two-part series that explores the growing opportunities in alternative energy and battery storage. Read Part 1.

California: A Model Fit for Storage

The challenge to meet two-way grid functionality is most pressing in California, which is on track to meet its goal of generating 33% of electricity from renewables in 2020. The oft-cited "Duck Curve" forecasts the topology of electricity demand that conventional power utilities must meet in California as the state becomes more renewable-dependent. This illustrates the magnitude of the inflection in expected conventional electric demand when solar contributes the majority of its supply during daylight hours and, conversely, when solar "shuts off" when the sun sets. This phenomenon is magnified in the winter months (the sun sets before the evening peak load), as well as during outages and natural disasters, all factors that would likely increase the state's vulnerability to price spikes and power disruptions. The seasonal volatility and potential for over/undergeneration as we approach the 2020 scenario calls for a solution to normalize demand, as the current state of the grid is not equipped to fluctuate so dramatically to meet demand. The answer from a cost and reliability perspective: battery storage.

Indicative Hourly Conventional Electric Utility Demand

hourly-electric-utility-demand-chart-may-2016Source: CAISO. California's Duck Curve: Illustrative trajectory of grid electricity demand as more homeowners switch to solar, thus not needing to tap the grid at hours at which the sun is strongest. As California achieves higher penetration each year, grid demand continues to fall, exacerbating the slope of demand ramp-up when the sun "shuts off" and grid turns on. This phenomenon is named after the resemblance to the profile of said water fowl.

The Need for Bigger, Better, Cheaper Batteries

The technology behind battery storage for the grid initially emerged from batteries used in laptops, consumer electronics, and electric vehicles (EV), with declining input prices and improving technology driving the adaption into larger-scale formats. There is currently extensive debate on the particular chemistry of the "optimal" grid battery (it differs from that of EV batteries, which must be light, dense and compact as they are installed in vehicles, versus the storage battery, which can be larger and remains stationary). While absolute capital costs are important, the crucial element here is the levelized cost of electricity (LCOE), which measures the all-in cost of electricity produced by a given source, and is a metric that regulators use to compare different methods of electricity generation.

Quick Math: Traditional lithium ion batteries have at max 1,000 cycles (full charge to full discharge), with a degrading tail end after a few hundred cycles. Assuming 90% efficiency over its lifetime, a $100/kWh battery would equate to $0.11/kWh electricity storage ($100 divided by 1,000 cycles @ 90% efficiency). For scope, retail electricity in the U.S. averages ~$0.12/kWh.

Tesla: Pioneering the Cost Curve

Tesla's 10kWh PowerWall battery retails for $3,500, or $350/kWh. This looks expensive and uneconomical relative to the LCOE math, but it is worth noting that the product is testing a niche market and the manufacturing itself has significant room for cost reduction when production becomes mainstream. Tesla projects battery costs to drop to $100/kWh by 2020, a target seconded by General Motors (GM), which predicts hitting the $100/kWh mark by 2021.

Similar to the decline in the cost of solar photovoltaic/PV (which includes price of polysilicon, installation costs, and sales/customer acquisition costs) of 50% in just five years, the same is expected of battery storage system price declines (lithium metal, increasing density per gram, and manufacturing in scale). The LCOE of combined solar and storage, while not a means to go fully "off-grid" permanently, is headed in a direction competitive with traditional power generation.

grid-only-electricity-chart-may-2016Source: RMI. Long-term outlook: Illustrative graph charting the difference between grid-only electricity at 3% annual escalator (top line), combination of grid +solar (middle line), and grid +solar + battery (bottom line). The first scenario is self-explanatory. The second reflects savings from solar, which has lower LCOE than traditional power generation, but still relies on the grid during evening hours and, thus, pays grid pricing when utilized. The third scenario, where electricity is predominantly supplied by solar and battery with grid access during outages and unforeseen events, reflects how customer insulation from utility price increases could be achieved. The cluster of states and their estimated electricity prices in 2050 are scattered around the bottom line, with state-by-state variance driven by the number of sunshine hours per day.

This is Only the Beginning for Storage

The debate on how to change the way we power our lives is a continuing one, although the conclusions are far more in favor of alternative energy and battery storage than ever before. Not limited only to an economic rationale, the unmeasured benefits on the environmental impact of replacing coal with the sun is another incentive spurring the change. The storage industry, while still nascent in implementation and from an investment perspective, is developing rapidly due to a need to complete the formula for the argument for solar, and why it should be here to stay.


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EM Bond Credit Ratings Downgrades Call for Diversification http://www.vaneck.com/blogs/etfs/em-bond-credit-downgrades-call-for-diversification-may-2016/ Although many EM countries have benefited from improved bond credit rating over the past two decades, this trend has stalled since 2013. Diversification within an allocation to EM bonds can help investors navigate this environment.

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Van Eck Blogs 5/20/2016 12:00:00 AM

Authored by William Sokol, Product Manager, ETFs

EM Bond Creditworthiness Has Improved

Over much of the past two decades, many emerging markets (EM) countries have benefited from a number of factors that have generally led to improved credit ratings. Until a few years ago, strong growth in China and rising commodity prices helped drive economic growth among many raw materials exporters. Central bank monetary stimulus in many developed countries led to capital flows into EM countries, helping to finance growth and keep borrowing costs low. Perhaps most important in explaining this long-term trend of improving creditworthiness are the structural reforms which many countries implemented after the financial crises of the 1980s and 1990s. Adoption of floating exchange rates and an increased ability to issue debt in local currencies has helped reduce the impact of external shocks on many EM economies.

But Has the Improvement Trend Stalled?

Since 2013, the long-term improvement in EM credit ratings appears to have stalled. This change is illustrated by the evolution in the credit rating composition of the J.P. Morgan EMBI Global Diversified Index,1 which tracks the U.S. dollar denominated EM sovereign and quasi-sovereign bond market. The investment-grade-rated portion of the Index reached a peak of 66% in 2013, versus 45% ten years prior and only 14% in 1997. However, this figure has been declining since 2013, with the high yield portion of the Index reaching 46% at the end of April.2  

Investment Grade and High Yield Rating Breakdown
of the J.P. Morgan EMBI Global Diversified Index
1997 to April 2016

 
Source: J.P. Morgan. Past performance is no guarantee of future results and may be lower or higher than current performance.

 

A spate of downgrades in recent years has included some notable losses of investment grade status by certain countries. For example, Brazil experienced downgrades as a result of economic contraction, deteriorating fiscal health, and political gridlock. Russia's high dependence on oil and gas to help finance economic growth and government expenditures, and the impact of Western imposed sanctions, resulted in downgrades beginning in 2014. South Africa now finds itself facing the possibility of losing its investment grade status as it struggles with low growth and high public debt levels.

Positive Credit Stories Can Still be Found

The story, however, is not all doom and gloom. A number of EM countries have seen an improvement in their credit ratings in recent years. For example, effective economic reforms in Peru and the Philippines have had a positive impact on the fiscal health of these countries, which led to rating upgrades. Hungary's credit rating has benefitted from economic growth and the government's commitment to managing debt levels and spending, which may help it to regain investment grade status. In Indonesia, policy effectiveness and a relatively healthy balance sheet have led to expectations of a possible upgrade this year, which may result in an investment grade rating from all three major rating agencies.

Diversify within EM Bonds

The diverging credit ratings among EM countries, and the fundamental drivers of these changes, serve as a reminder of the importance of diversification within an allocation to EM bonds. By diversifying across countries, sectors, currencies, and credit quality, investors can gain exposure to the full spectrum of EM debt. For example, the local currency debt universe is skewed toward higher rated issuers because countries with larger local bond markets also generally have greater economic stability and borrower rights. Therefore, this market can help investors reduce credit risk relative to the broad hard currency EM sovereign bond market while taking on exposure to local currencies.

Potential for Higher Yields and Increased Diversification

Over the long term, an allocation to EM bonds can potentially provide both yield enhancement and diversification benefits within a broader portfolio. EM bond yields have risen since early 2013, reflecting the market's assessment of creditworthiness, and may offer a yield premium versus developed bond market yields. Low correlation3 with other asset classes, including core fixed income sectors, may improve a portfolio's diversification.

Investors can access bonds issued by emerging market governments and denominated in local currencies with the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC). Investors seeking to invest beyond sovereigns can gain access to high yield bonds issued by EM corporate issuers through the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM). Alternatively, investors seeking diversified exposure to the broad EM debt universe across both sectors and currencies can do so through the VanEck Vectors Emerging Markets Aggregate Bond ETF (EMAG).


 
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Alternative Energy: A Transformative Storage Boom? Part 1. http://www.vaneck.com/blogs/natural-resources/transformative-storage-boom-part-1-may-2016/ Exploring the growing opportunities in solar alternative energy and the need for increased battery storage, as California leads the U.S. in what may become widespread adoption. 

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Van Eck Blogs 5/18/2016 12:00:00 AM

This is part one of a two-part series by Analyst Zhang that explores the growing opportunities in alternative energy and battery storage.  

Alternative Energy: A Transformative Storage Boom?

The convergence of solar electricity ("solar") and battery storage may approach a tipping point in widespread adoption over the next ten years, as cost curves and improving technology make implementation more economic for homeowners.

Over the past decade, residential solar demand has grown tenfold, yet still comprises less than 2% of electricity generation in the U.S. This low level of penetration is not spread evenly across the country, with certain "pro-solar" states (both geographically and politically) commanding the vast majority of growth.

California and Hawaii Lead U.S. Solar Adoption

Congress recently renewed the solar investment tax credit (ITC) and many industry sources forecast this level of penetration to increase steadily over the next five years, growing from 7GW (gigawatts) in 2015 to 18GW in 2020. We look to states such as California and Hawaii, which led the U.S. in solar electricity adoption (51% and 7%, respectively), and of which solar comprises 7% and 15% of their respective electricity generation, as prime models for a renewables-driven future.

Total U.S. Solar Demand  

 
Source: SEIA, Solar Energy Industries Association.

 

Cumulative U.S. Solar Demand by State  

 
Source: GTM Research.

 

At this rate of expansion, a key question remains as to whether the U.S. electrical grid will be able to handle the rapid adoption of solar, and how quickly. Utilities have built the nation's electric grid for one-way power flow: from utility to home. The current policy of net metering, which allows consumers with solar panels to "sell" power back to the grid, requires substantial investment from utilities into the transmission system (smart meters, intelligent switches) to help create a more reliable and robust network.

Modernizing the Electric Grid

This all comes at a sizeable cost. The American Society of Civil Engineers estimates that utilities will spend over $20 billion annually over the next several years on the maintenance of aging infrastructure. Spending in recent years has only been targeted on hardening the system against weather-related outages, not in preparing the grid for two-way flow.

These costs are naturally passed on to customers (half of a customer's electricity bill is for transmission and distribution (T&D) charges, which include the cost borne by utilities for operating, maintaining, and upgrading the grid), and explains, in part, the increase in electricity prices over the past decade, despite falling power generation fuel costs, such as natural gas. Industry experts estimate the cost of modernizing the national grid will cost more than $475 billion over the next 20 years, which translates to twice the current spend on T&D.

In Part 2, we will explore the need for a more flexible and modern grid and how this is likely to spur growth and innovation in the form of battery storage.


 
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Munis: Keep the Pedal to the Metal http://www.vaneck.com/blogs/muni-nation/keep-the-pedal-to-the-metal-may-2016/ Jim shares what he considers the optimal municipal bond strategy at this time, based on the muni market's positive year-to-date performance and the key fundamentals that support it.

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Van Eck Blogs 5/17/2016 12:00:00 AM Those of you who recall the CB (citizens band) radio craze of the 1970s may recognize the following expression the era spawned: "Keep the pedal to the metal." Its fundamental meaning — push ahead with determination — comes to mind as I consider what I believe is the optimal municipal bond strategy at this time.

Following recent and very thoughtful guest contributions to Muni Nation, I thought it's time I provide my outlook for the remainder of the second quarter. Firstly, I think it is important to take note of the municipal market's performance thus far in 2016 (through April 29). Returns were positive each of the last four months; the market is up 2.42% year-to-date1. The eight consecutive months of cash inflows into muni funds that helped fuel these gains highlight the key fundamentals supporting this market: a modest increase in new bond supply, the historically low default rate2 underlying the majority of issues, and the taxable equivalent yields compared to many taxable alternatives.

Comparative Index Yields (Nominal vs. Taxable Equivalent Muni)
As of 5/1/16

Source: Barclays. For illustrative purposes only. Index performance is not indicative of fund performance. Past performance is no guarantee of future performance. Municipal index yields reflect taxable equivalent yields, based on the highest U.S. Federal income tax rate of 39.6%. If an investor were in a lower tax bracket, the yields would have been lower.

Additionally, I believe that yields should hold at or near current levels even in the unlikely event that the Federal Reserve pushes interest rates higher before the end of the year. I would continue to expect munis to deliver relatively favorable returns.

Invoking the title of this piece, I suggest again: keep the pedal to the metal. Municipals can continue to form an important part of an investor's core strategy in the near future. Investors should not deviate from employing municipal bonds, both tactically and strategically, in their portfolios. Stay the course.

Post Specific Disclosures

1Source: Barclays. Based on the Barclays Municipal Bond Index. The index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.

2Source: Moody's Investors Services.

Yield to Worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.

Taxable equivalent yields are used by investors to compare yields on taxable and tax-exempt securities after accounting for federal income taxes. TEY represents the yield a taxable bond investment would have to earn in order to match, after deducting federal income taxes, the yield available on a tax-exempt municipal bond investment. TEY = Tax-Free Municipal Bond Yield/(1 -Tax Rate).

The graph displays the yields of the Barclays Municipal Bond Index and Barclays High-Yield Municipal Index on a tax-equivalent return basis and compares such yields to other asset classes as represented by the indexes described below. Fixed income investments have interest rate risk, which refers to the risk that bond prices generally fall as interest rates rise and vice versa. U.S. government bonds are guaranteed by the full faith and credit of the United States government. Municipal and corporate bonds are not guaranteed by the full faith and credit of the United States and carry the credit risk of the issuer. Municipal bonds are exempt from federal taxes and often state and local taxes. U.S. Treasuries are exempt from state and local taxes, but subject to federal taxes. Prices of bonds change in response to factors such as interest rates and issuer's credit worthiness, among others.

The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays High-Yield Municipal Bond Index is considered representative of the broad market for below investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays U.S. Corporate Bond Index is considered representative of the broad market for investment grade U.S. corporate bonds with a maturity of at least one year. The Barclays U.S. Treasury Index is considered representative of public obligations of the U.S. Treasury with a remaining maturity of at least one year.

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Navigating the Oil Market's Rebalancing http://www.vaneck.com/blogs/natural-resources/navigating-the-oil-markets-rebalancing-may-2016/ Despite the volatile environment for oil, there are oil/gas exploration and production companies that are surviving and thriving. Identifying them is an important part of our process.

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Van Eck Blogs 5/12/2016 12:00:00 AM

Watch Video Video - Navigating the Oil Market's Rebalancing  

Shawn Reynolds, Portfolio Manager

Watch Now  


 

Oil Market's Shifting Supply and Demand Fundamentals

TOM BUTCHER: Shawn, thus far in 2016, have supply and demand fundamentals in the oil market shifted as you expected them to?

SHAWN REYNOLDS: We believe that there is no doubt that the oil market's supply and demand fundamentals are coming into place and will tighten through the end of the year. However, we think the timing is unclear in terms of how fast or slow this will happen, but we are likely to see tightening later in the year. The biggest surprise has been the depth of the changes at hand, which have created a sense that tightening might happen quicker than expected; but in our opinion, tightening is certainly going to last for some time.

When we talk about the depth of changes, we refer to the rig counts here in the U.S., which have fallen 78%. That is unprecedented in the time that we have been counting rigs drilling in the U.S., which began in the 1970s. We also look at activity levels and investment levels overseas.

Declining Rig Counts Across the Globe
U.S. Count Down 78%
 

 

Source: Bloomberg, as of March 2016.

If we look more closely at integrated oil companies and consider that they cut capital investment plans by 25% in 2015, and are expected to cut another 25% in 2016, we again find that there has been no precedent. These developments have never been experienced in the history of the modern oil industry. While things are more or less playing out as we expected, there are certainly some surprises. They may be taking place slowly now, during the first part of the year, but they will likely speed up and endure for some time in terms of upside price correction.

BUTCHER: What might be some of the long-term effects of those capital investment cuts on the integrated oil companies?

Big Oil Projects Postponed or Canceled

REYNOLDS: It has been staggering to observe the reactions from the integrated companies. Obviously, many headlines focus on U.S. oil shale and the rig count reduction of 78%. If you dig into the volumes that are connected with these two major changes taking place, the E&P (exploration and production) companies and the integrated oil companies will not experience equivalent impact. The potential impact on the integrated oil companies will be significantly larger and longer term.

What do these reductions in capital investments entail? They mean big projects being canceled or postponed. If you add it all up, we're looking at somewhere between 6-13 million barrels a day of projects being postponed or canceled. These projects were slated to take place between 2014 and 2020 and now they are off the shelf until post 2020, if at all.

We are seeing big projects being canceled by individual companies. For example, Petrobras [Brazil's Petróleo Brasileiro S.A], or Royal Dutch Shell [Netherlands], or Chevron [U.S.], or Total [France]. Every single one of these multi-national companies is canceling major projects. For example, the French company Total has not approved any major projects in 2014 or 2015 and will likely not approve anything in 2016; and it has nothing on the docket for 2017. Royal Dutch Shell hasn't approved anything since 2013, except for one project in the deepwater Gulf of Mexico.

Integrated Cos. Likely to Suffer Multi-Year Declines in Production

This activity is unprecedented, and we believe it sets up a situation where the oil production of integrated companies, which has grown slowly over the years but is still growing, will begin to decline. We expect a multi-year decline that may not begin until later in 2016 or perhaps early 2017. By late 2017, and certainly for several years thereafter, we are likely to see a very methodical decline in overall supply. This will heavily impact the overall oil market.

BUTCHER: For oil and gas exploration and production companies, what characteristics have enabled the successful ones to survive?

Geology, Technology, and a Healthy Balance Sheet are Critical

REYNOLDS: There are companies that are surviving and thriving. Identifying these strong companies is an important part of our process. We have always looked for a special set of characteristics that allows important and steady structural growth.

What specifically do we look for? We spend time identifying companies with the right acreage and the right geology. That's something we do every day. We look at individual oil well results, and try to figure out what are the sweet spots for a given location. Sometimes consensus is that everybody knows exactly where the sweet spot is; but if you're off by a few miles or a few counties, it can make a significant difference in who actually has the best rock. Therefore, we spend a great deal of time looking for the companies with the best rock. That is number one.

Technology Should be Part of the Company’s DNA

Number two is technology. The shale phenomenon in the U.S. is all about evolutionary technology and taking it step-by-step, tweaking small aspects of the technology in order to increase reserve bases, increase production rates, lower costs, and raise returns. We are always looking for companies that incorporate this process as part of its DNA or culture, and not something they're just pulling off the shelf to try because it worked for someone else. It is the scientific culture at the heart of a company that is key in making shale production economic and taking it to the next step in terms of adding unexpected amounts of reserves.

Balance Sheet Strength Fosters Innovation

Number three is does the company have the balance sheet, the financial wherewithal to try different ideas? Obviously, if you are squeezed on your cash flow or your balance sheet is stretched, you are not willing or able to try different technologies or methods. You are not likely to risk trying something different and potentially see it fail, only to end up with a dry hole. That kind of outcome is really unacceptable, especially in this environment. But if you do have a strong balance sheet, you're willing to try something new. We have always looked for this profile, and it is especially important in this environment. Last summer, balance sheets became even more critical, not only in terms of flexibility and the ability to try new technologies, but also in terms of simple survival. Can the company survive tough times when the price of oil is low?

The three characteristics we have always considered are the acid base or the geology, technology, and the balance sheet. This approach has paid dividends during this downturn and certainly in the early part of this year.

BUTCHER: Thank you.

 
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Gold Extends its Strength in April http://www.vaneck.com/blogs/gold-and-precious-metals/gold-extends-strength-in-april-may-2016/ The gold market continues to strengthen. In April the gold price broke out of its consolidating pattern to reach its 2016 high of $1,296 per ounce; YTD gold has gained 21.9%.

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Van Eck Blogs 5/11/2016 12:00:00 AM

For the month ended April 30, 2016

Gold Up 5% in April, Climbing 22% YTD

The gold market has moved from a position of strength to one of even greater strength. The gold price entered a consolidation in March but never traded below $1,200 per ounce. Late in April the gold price broke out of its consolidating pattern to reach its 2016 high of $1,296 per ounce and ended April at $1,292.99 per ounce for a gain of $60.28 (4.9%). On May 2 gold traded above $1,300 per ounce for the first time since January 2015. We believe that an increasing sense of financial risk and U.S. dollar weakness are driving investment demand for gold. When commenting on the global economy in a Bloomberg interview on April 5, International Monetary Fund (IMF) President Lagarde indicated that downside risks have increased and "we don't see much by way of upside." Gold moved to its high for the month following the Commerce Department's April 28 release of weaker-than-expected first quarter U.S. GDP growth of just 0.5% annualized. Markets seemed confounded by the strength exhibited by the Japanese Yen (JPY) and the Euro (EUR), despite negative rate policies in both regions. As a result, the U.S. Dollar Index (DXY)1 declined 1.7% in April and fell to a 15-month low on May 2.

A Notable Surge for Silver

This year's bull market in precious metals gained in breadth as silver kicked into gear in April. Like gold, silver is a monetary metal but it had been lagging gold's performance. In fact, the gold/silver ratio reached a long-term high of 83.2 on March 1. Strong inflows into silver bullion exchange traded products (ETPs) in March and April enabled silver's year-to-date performance to surpass gold on April 14. For the year, silver is up 28.7%, while gold has gained 21.9% and the gold/silver ratio ended the month at 72.4. We regard silver as a leveraged proxy for gold and wouldn't be surprised to see the gold/silver ratio continue to fall further towards its long-term average of around 60.

Another sign of the strength of the current market is the performance of gold stocks. On April 8 the NYSE Arca Gold Miners Index (GDMNTR)2 surpassed its previous high for the year and never looked back, advancing 28.1% in April. Many of the larger producers announced favorable first quarter results in April, which boosted the performance of gold equities.

Our patience was tested in the first quarter by the underperformance of many of the junior producers and developers in our portfolio. The junior gold stocks had been lagging but our perseverance has appeared to pay off. The MVIS Global Junior Gold Miners Index (MVGDXJTR)3 gained 36.8% in April and had lagged the GDMNTR until April 8 but is now outperforming the GDMNTR by 11.7% for the year. The MVGDXJTR caught up with the GDMNTR for the year by outperforming in March with an 8.6% gain.

Market Outlook: Are Gold Stocks Overbrought?

We identified several reasons for this year's spectacular rise in gold stocks, which has caused gold stocks (GDMNTR) to gain 87.4% and the juniors (MVGDXJTR) to gain 99.1% year-to-date (YTD):

  • Positive changes in sentiment and investment demand for gold.
  • Companies have successfully slashed costs, cut debt, gained efficiencies, and generated cash.
  • Mean reversion in a sector that had been oversold during the worst bear market in history.
  • Elimination of short selling pressure that had been weighing on gold and gold stocks since they crashed in 2013.
  • Limited liquidity in a relatively small sector with a global market cap of just $260 billion.

Gold Still Below 2011 Levels, But Earnings Power is Stronger

These heady gains suggest to us that gold stocks have become overbought. We expect there will probably be a correction at some point this year, however, given the current impressive strength and breadth of the market, we believe positioning the portfolio for a correction could put it at risk of missing further upside. Seasonal patterns have been absent in the gold market for the past several years, possibly due to the overwhelming selling pressure that prevailed. Without such intense selling, we may again see seasonal patterns from Asia and India lead to some weakness in the summer months but strengthening in the fall and extending into the new year. We remain cognizant that GDMNTR is still down 61% from its 2011 highs, which translates to a 159% gain needed to return to 2011 levels. The gold price was much higher in 2011 as well, topping at $1,921 per ounce, but we think the earnings power of the gold sector is greater now than it was back then. We estimate that a $100 (roughly 8%) move in the gold price from $1,300 to $1,400 per ounce would result in a 38% increase in free cash flow for the majors in our research universe, while the mid-tier producers would see a 68% increase in free cash.

Gold Supported by Negative Sentiment Toward Central Bank Policies

The $217 per ounce (23%) increase in the gold price since the U.S. Federal Reserve (the "Fed") hiked interest rates in mid-December wasn't caused by a crash or panic in the financial markets. There hasn't been a systemic crisis and in fact, global conditions today aren't that different than six months ago when gold struggled near its lows. In our view, the fundamental change that has enabled gold to perform well since the Fed's rate announcement is a change in investors' view of central banks. The U.S. dollar has weakened mainly because the market no longer anticipates a series of Fed rate increases. Investors are realizing that central bank policies lack efficacy and have run their course without accomplishing their intended results. In general, central banks appear to be rapidly running out of options to help stimulate economies. In fact, rather than helping, quantitative easing, zero rates, and negative rates have created distortions in capital allocation, leading to the mispricing of assets and currencies, wealth inequality, and possibly other harmful, unintended consequences on the financial system.

Governments Failing to Stimulate Economic Growth

We think the solution to most of the world's problems hinges on re-establishing robust economic growth. A major reason that central bank policies haven't been able to foster as much growth as desired is that fiscal and regulatory policies are working against them. Governments around the world have increased debt to unheard of levels to raise capital to spend on projects, programs, and entitlements that generate a fraction of the jobs and growth that the same capital may have generated through private sector channels.

The popular perception that the banks were responsible for the subprime crisis has resulted in fines and regulatory burdens that hamper the formation of capital at the center of the financial system. The "wolf" character in the 2013 movie "The Wolf of Wall Street" ran a boiler room on Long Island that was unrelated to investment banks on Wall Street. The 2015 film "The Big Short," an Academy Award nominee for Best Motion Picture, puts the blame for the financial crisis squarely on the banks. It makes barely any mention of the Government Sponsored Enterprises' (GSEs such as Fannie Mae and Freddie Mac4) role in sponsoring subprime loans or the long-running government policies under the Clinton and Bush Administrations that enabled high risk borrowers to own homes despite their inability to service a mortgage. The tone was set in 2009 when President Obama labeled bankers as "fat cats." While banks certainly played a part, the government played the lead, in our opinion. Unfortunately, these misperceptions and misplaced blame have guided policy, leading to a financial system that is probably weaker than it was before the crisis. We believe that the economy is clearly weaker.

Regulatory Burdens Punish the Private Sector

In addition, regulations that burden the private sector have also increased. According to The Wall Street Journal, the Obama Administration is on track to issue 439 major regulations in its 8 years in office, more than the Bush Administration's 358 or Clinton's 361. Heaping on more and more regulations only serves to stifle business formation, profitability, and innovation.

A similar tipping point has been reached with tax policies. Some companies have been re-domiciling away from the United States to avoid tax rates that are among the highest in the world. Instead of revising and simplifying the tax code to address the problem, the U.S. Treasury implemented new regulations that force U.S. corporations to remain in the U.S., placing them at a disadvantage to their global peers.

The UN is a Sobering Example of a Governmental Institution

How often do we see leaders in government promote policies that help make business more productive, efficient, or profitable? As to where we are heading, we look to possibly the most monolithic governmental institution in the world. An article published in The Wall Street Journal and written by a retiring United Nations ("UN") assistant secretary general for field support articulated a sentiment worth sharing. After relocating to the New York headquarters of the UN, he became disheartened, remarking: "If you lock a team of evil geniuses in a laboratory, they could not design a bureaucracy so maddeningly complex, requiring so much effort but in the end incapable of delivering the intended result. The system is a black hole into which disappear countless tax dollars and human aspirations, never to be seen again."

Environment of Uncertainly Supports Gold Investments

We believe this is the sentiment that gold investors feel when they see central banks resort to more radical monetary policies in an attempt to spur economies bogged down by taxes, regulations, and bureaucracy. Moreover, there are social policies that incentivize people not to work and foreign policies that have resulted in chaos. The investment demand evidenced by the strong inflows into the bullion ETPs this year suggests that many investors are making a strategic investment in gold to diversify and prepare their portfolios for the uncertainty of a financial system that may become increasingly dysfunctional.

Download Commentary PDF with Fund specific information and performance»

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A Star-Spangled April for Moats http://www.vaneck.com/blogs/moat-investing/star-spangled-april-for-moats-may-2016/

April was another strong month for moat investing. The U.S.-focused Morningstar® Wide Moat Focus IndexSM continued to outperform the S&P 500® Index, and though the Morningstar® Global ex-US Moat Focus IndexSM trailed broad international markets, it still managed to outperform them year-to-date.

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Van Eck Blogs 5/10/2016 12:07:43 PM

For the Month Ending April 30, 2016

Performance Overview

Moat-rated companies continued their strong start to 2016 in April. U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) topped the S&P 500® Index (5.20% vs. 0.39%) in April and widened the gap in relative performance year-to-date (12.05% vs. 1.74%). On the international front, Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) lagged the MSCI All Country World Index ex USA in April (1.43% vs. 2.63%), but maintained relative outperformance year-to-date (4.09% vs. 2.25%).

U.S. Domestic Moats: Healthcare Rotation Pays Off

St. Jude Medical, Inc. (STJ US) was the big winner among domestic moat-rated companies in April. Late in the month Abbott Laboratories (ABT US) announced its intent to buy STJ US in a deal that is expected to close in the coming fourth quarter. As part of its quarterly review, the MWMFTR Index rotated into several healthcare companies, including STJ US. According to Morningstar, the healthcare sector offered a number of attractive valuation opportunities in March, some of which contributed to MWMFTR's strong performance in April. Drug manufacturer Allergan plc (AGN US), however, provided no such boost to results. A U.S. Department of Treasury tax ruling squashed any hope for its planned merger with Pfizer, pushing AGN US lower for the month.

International Moats: Oh, Canada

MGEUMFUN's exposure to financials companies, particularly Canadian banks, contributed to positive performance in April. Only three of the 24 financials companies in the Index posted negative returns last month. Additionally, Russian operator Mobile Telesystems (MTSS RM) has been on a roll since announcing solid fourth quarter results in March. Strains on performance came largely from some of the Index's consumer discretionary constituents, such as Macau gaming firm Sands China (1928 HK) and Chinese car manufacturer Dongfeng Motor Group Co. (489 HK).

Shooting for the Stars

VanEck Vectors Morningstar Wide Moat ETF (MOAT), which seeks to track MWMFTR, received a 5-star Morningstar Rating as of April 30, 2016.

Overall Morningstar Rating among 1,374 large blend funds as of April 30, 2016.



(%) Month Ending 4/30/16

Domestic Equity Markets

International Equity Markets

(%) Month Ending 4/30/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
St. Jude Medical, Inc.
STJ
38.55
Bank of New York Mellon Corporation
BK
9.72
LinkedIn Corporation Class A
LNKD
9.58
Norfolk Southern Corporation
NSC
8.24
Express Scripts Holding Company
ESRX 7.34

Bottom 5 Index Performers
Constituent Ticker Total Return
Varian Medical Systems, Inc.
VAR
1.45
Visa Inc. Class A
V
0.99
Jones Lang LaSalle Incorporated
JLL
-1.83
Gilead Sciences, Inc.
GILD
-3.97
Allergan plc
AGN
-19.20

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
National Bank of Canada NA CN 8.97
Mobile TeleSystems PJSC MTSS RM 8.92
KBC Groupe SA KBC BB 8.70
Bank of Nova Scotia BNS CN 8.28
Bank of Montreal BMO CN 8.12

Bottom 5 Index Performers
Constituent Ticker Total Return
Royal Philips NV PHIA NA -3.65
China Telecom Corp. Ltd. Class H 728 HK -5.86
Embraer S.A. EMBR3 BZ -11.42
Dongfeng Motor Group Co., Ltd. Class H 489 HK -11.99
Sands China Ltd. 1928 HK -12.03

View MOTI's current constituents

As of 3/18/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Jones Lang Lasalle Inc JLL US
Allergan plc AGN US
State Street Corp STT US
Visa Inc A V US
Gilead Sciences Inc GILD US
CBRE Group Inc. CBG US
Express Scripts Holding Co. ESRX US
Amgen Inc AMGN US
Mastercard Inc A MA US
Walt Disney Co DIS US
McKesson Corp MCK US
The Bank of New York Mellon Corp BK US
LinkedIn Corp LNKD US
US Bancorp USB US
St Jude Medical Inc STJ US
Norfolk Southern Corp NSC US

Index Deletions
Deleted Constituent Ticker
Polaris Industries, Inc PII US
Twenty-First Century Fox Inc A FOXA US
Harley-Davidson, Inc HOG US
Vf Corp VFC US
Time Warner, Inc TWX US
Berkshire Hathaway Inc B BRK/B US
Western Union Co WU US
American Express Company AXP US
Kansas City Southern, Inc KSU US
Union Pacific Corp UNP US
Emerson Electric Company EMR US
United Technologies Corp UTX US
Spectra Energy Corp SE US
Wal-Mart Stores, Inc WMT US
Intl Business Machines Corp IBM US
Qualcomm, Inc QCOM US

View Latest MOAT Reconstitution Report
View MOAT's list of current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Index Additions
Added Constituent Country
Cameco Corp Canada
National Bank of Canada Canada
Swatch Group AG Switzerland
Genting Singapore Plc Singapore
KBC Group NV Belgium
Embraer S.A. Brazil
BNP Paribas France
UBS Group AG Switzerland
Centrica United Kingdom
Novartis AG Switzerland
Richemont, Cie Financiere Switzerland
CapitaLand Commercial Trust Singapore
Roche Hldgs AG Ptg Genus Switzerland
Swire Properties Ltd Hong Kong
Bank of Nova Scotia Halifax Canada
Julius Baer Group Switzerland
Ioof Hldgs Ltd Australia
Grifols SA Spain
Contact Energy Ltd New Zealand
Mobile TeleSystems PJSC Russian Federation
China State Construction International Holdings Ltd. China
Henderson Group Plc United Kingdom
Teva Pharmaceutical Industries Israel
Sands China Ltd. Hong Kong

Index Deletions
Deleted Constituent Country
National Australia Bank Ltd Australia
Goodman Group Australia
Spotless Group Holdings Ltd Australia
Qube Holdings Ltd Australia
Banco Santander Chile Chile
Empresa Nacional De Electricidad Sa Chile
Agricultural Bank Of China Ltd China
Bank Of China Ltd China
Industrial And Commercial Bank Of China Ltd China
Beijing Enterprises Holdings Ltd. China
Banco Bilbao Vizcaya Argentaria Sa Spain
Svenska Handelsbanken Sweden
Nordea Ab Sweden
Power Financial Corp Canada
Power Corp Of Canada Canada
Enbridge Inc Canada
Capitaland Mall Trust Reit Singapore
Wharf (Holdings) Ltd. Hong Kong
Ambuja Cements Ltd India
Itc Ltd India
Sun Pharma Industries Ltd India
Linde Ag Germany
Numericable Group France
Kering France

View Latest MOTI Reconstitution Report
View MOTI's list of current constituents



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Munis: The Compelling Case for Closed-End Municipal Bond Funds http://www.vaneck.com/blogs/muni-nation/the-compelling-case-for-closed-end-municipal-bond-funds-may-2016/ ]]> Van Eck Blogs 5/10/2016 12:00:00 AM In my opinion, municipal bond closed-end funds (CEFs) are an attractive investment opportunity at this time. They are actively managed and offer exposure to many well-known managers with strong track records. They also provide access to potentially high yielding securities, such as private placements and structured securities, that are not otherwise readily available to many investors.

The VanEck Vectors CEF Municipal Income ETF (XMPT) is an efficient way to access CEFs and the potential benefits I believe they offer. XMPT seeks to track the S-Network Municipal Bond Closed-End Fund Index (CEFMX). XMPT and CEFMX nicely illustrate some of the primary reasons why I find CEFs so very compelling:

  • Tax-exempt yields
  • Extensive diversification characteristics
  • Narrowing discounts
  • Ability to benefit from leverage
  • Favorable market environment

Tax-Exempt Yields1

CEFMX derives its yield advantage by allocating 86% of its total weighting to leveraged CEFs. Additionally, the rules governing the index assign a higher weighting to CEFs selling at discounts to their Net Asset Values (NAVs). As of March 31, 2016, the components of the index traded at an average discount of 3.90% and provided a yield of 5.5%. This index’s yield is the pre-tax equivalent of 9.11% for investors subject to the maximum federal tax rate of 39.6% and the pre-tax equivalent of 7.64% for those subject to the federal AMT (alternative minimum tax rate of 28%).

Extensive Diversification Characteristics

Many buyers of CEFs are not diversified enough in my opinion and don’t have the necessary time to extensively research individual CEFs. As a fund of funds, XMPT provides diversification by asset class, manager, and number of issues.

Narrowing Discounts1

CEFMX had positive absolute and relative returns as it increased 5.40% for the quarter ended March 2016 while the S&P National AMT-Free Municipal Bond Index was up only 1.58%. CEFMX is also up 10.60% over the past 12 months compared to a 3.93% increase in the S&P National AMT-Free Municipal Bond Index. Part of the recent positive returns result from a narrowing of the discount on the underlying CEFs.

S-Network Municipal Bond Closed-End Fund Index: Discount/Premium
As of 3/31/2016

 

Source: Bloomberg. As of 3/31/2016. Indices are unmanaged and are not securities in which an investment can be made. See index descriptions at the end. Past performance is not indicative of future results.

The weighted discount for the index was 3.90% as of March 31, 2016, compared with 6.27% at the end of the previous quarter. This discount is now more in line with historical norms and has narrowed as the equity markets recovered in the past quarter. Discounts on CEFs tend to widen in volatile equity markets and the average discount of CEFMX was higher over the last two years in weaker markets for its underlying municipals bonds. Unless there are major sell-offs in either the equity or municipal bond markets, I expect to see not much risk in discounts widening in the near future.

Potential to Benefit from Leverage1

Municipal CEFs also have unique structures that allow them to leverage their holdings by borrowing at low tax-exempt money market rates to buy additional long-term bonds. Given today’s steep yield curve and oversold municipal bond market, this leverage substantially enhances yield. Leverage increases the risks of declining asset values in a rising rate environment but the leverage on most CEFs is limited to 34% of assets. Leveraged CEFs also hold high quality bonds since they are used for collateral on their own borrowings, which seek to maintain AAA ratings.2

Favorable Market Environment1

Moreover, I believe the underlying market for municipal bonds looks favorable. Federal spending cuts are not likely to affect municipal credits and the U.S. economy continues to grow at a moderate rate, which is also good for municipals. In addition, the recent tax rate increase for the wealthiest Americans and the likelihood of further rate hikes or losses of deductions help support the market for municipal bonds. However, as the market outlook appears better, CEFs investing in municipal bonds continue to sell at discounts to their NAVs. These discounts in turn increase the yield an investor gets at the market price.

In the near term, I do not expect the risk of significant increases in short-term rates diminishing the yield advantage of leveraged CEFs. The Federal Reserve has raised term rates but appears to be in no rush for another increase. Most leveraged municipal CEFs are over-earning their current dividend payouts and are continuing to build levels of undistributed net investment income, which can provide a cushion to protect against future dividend cuts. As long as we are in a zone of higher relative yield and low risk of future CEF dividend cuts, I believe current valuations (discounts) make investing in municipal CEFs particularly attractive.

Not only do XMPT and CEFMX participate in the inherent CEF features described above, I also think they possess uniquely favorable features due to the value approach of the CEFMX index. The 83 CEFs contained in CEFMX are selected and weighted using a proprietary rules-based methodology. The index uses a value approach to take advantage of pricing inefficiencies related to CEFs trading at discounts to their NAVs. Unlike most ETF indices, which are market-cap weighted, CEFMX weights initially by NAV so as not to give a greater weight to CEFs selling at richer valuations. It then tiers CEFs to overweight CEFs selling at higher discounts and underweight CEFs selling at lower discounts or premiums. This value approach tends to increase the allocation to undervalued CEFs during quarterly rebalancing and reduce exposure to more richly valued CEFs. On average, CEFMX has had a discount of 2% to 4% relative to its overall universe and its holdings are primarily high quality investment grade municipal bonds since its inception on 6/11/2011.

Learn more about XMPT and CEFMX.

Post Disclosure

Source: All data from S-Network as of 3/31/16, unless otherwise noted. Diversification does not assure a profit nor protect against loss. The use of leverage may magnify both gains and loss.

1 Index performance is not representative of fund performance. Click here for XMPT’s standardized performance, 30-day SEC yield, and expenses.

2 The S&P rating scale is as follows, from excellent (high grade) to poor (including default): AAA to D, with intermediate ratings offered at each level between AA and CCC. Anything lower than a BBB rating is considered a non-investment-grade or high-yield bond.

S-Network Municipal Bond Closed-End Fund Index (CEFMXTR): The index is comprised of municipal bond closed-end funds listed in the United States that are principally engaged in asset management processes designed to produce federally tax-exempt annual yield. S-Network Municipal Bond Closed-End Fund Index is calculated and maintained by S-Network Global Indexes, Inc. S-Network does not sponsor, endorse, or promote XMPT and bears no liability with respect to XMPT or any security. S&P National AMT-Free Municipal Bond Index (SPMUNUST): The S&P National AMT-Free Municipal Bond Index is a broad, comprehensive, market value-weighted index designed to measure the performance of the investment-grade tax-exempt U.S. municipal bond market. Bonds issued by U.S. territories, including Puerto Rico, are excluded from this index.

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Spin-Off in the Spotlight: The Chemours Company (NYSE: CC) http://www.vaneck.com/blogs/etfs/spin-off-chemours-company-may-2016/ Chemours (NYSE: CC) spun off from E.I. du Pont de Nemours and Co. (NYSE: DD) in July 2015, and as an independent company, it is now exercising considerable discretion over its expenses and is positioning for profitable growth going forward.

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Van Eck Blogs 5/4/2016 12:00:00 AM

Written by Horizon Kinetics' Research Analysts and CFA Charterholders Ryan Casey and Salvator Tiano, who together bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.

Spin-Off Company: The Chemours Company (NYSE: CC)
Parent Company:
E.I. du Pont de Nemours and Co. (NYSE: DD)  

Spin-Off Date: July 1, 2015
GSPIN Index Inclusion Date: October 1, 2015

The Chemours Company (NYSE: CC) was first added to the Horizon Kinetics Global Spin-Off Index ("Index") on October 1, 2015, approximately three months after the company was first spun off from E.I. du Pont de Nemours and Co. (NYSE: DD). Chemours is a leading global provider of performance chemicals through three reporting businesses: the Titanium Technologies division (the number one global producer of titanium dioxide), the Fluoroproducts division (the number one global producer of fluorochemicals and fluoropolymers), and the Chemical Solutions division (the number one producer of sodium cyanide in the Americas). All three businesses are believed to be relatively stable and mature. Parent company DuPont retained the faster growing, higher margin products that have yet to be commoditized. Chemours also assumed $3.9 billion of debt in the transaction, relative to $200 million in cash.

Chemours was officially spun off from DuPont in July 2015. Shortly after going solo, the company faced significant challenges, including a weak market for commodities and what many perceived to be a relatively high debt burden. Selling pressure caused Chemours shares to decline more than 50% in its first three months of trading. However, now that Chemours is an independent company, it has begun to exercise considerable discretion over its expense structure and is positioning itself for potential profitable growth going forward. (Please note that given the timing of the spin-off and the Index's rebalance schedule, Chemours' share price decline did not impact the Index.)

As stated in its 2015 year-end earnings release, Chemours was able to achieve $100 million in cost savings in 2015 and the company believes that it has the potential to achieve an additional $200 million in savings by the end of 2016. Furthermore, Chemours believes that by the end of 2017 it can increase EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by a total of $500 million, of which $350 million is expected to come from reducing structural costs and $150 million from market share growth in existing products. Given that the company earned $573 million in adjusted EBITDA in 2015, a year in which it faced shrinking demand and depressed pricing for its products, these growth projections indicate that Chemours could potentially double its EBITDA over the next two years, should pricing for its products recover. Such earnings could be used to reduce the company's $3.9 billion of debt or be reinvested for future growth. Either option has the potential to generate significant value for Chemours shareholders given that the market capitalization of the company currently stands at only $1.3 billion.

View Current SPUN Fund Holdings  

View Current GSPIN Index Holdings  

 

Spin-Off in the Spotlight provides spin-off research insights from Horizon Kinetics, LLC. The firm has produced spin-off research since 1996, and began covering international spin-offs in 2010. Horizon Kinetics Global Spin-Off Index (GSPIN) is the underlying index of VanEck Vectors Global Spin-Off ETF (SPUN), which was launched in June 2015. GSPIN tracks the performance of listed, publicly-held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia.

SPUNVanEck Vectors Global Spin-Off ETF

Capture the Full Potential of Spin-Offs Globally  

Key Features:

  • Spin-off investing is an established event-driven strategy
  • Global index coverage
  • Early, long-term stock positions allow index to capture full spin-off cycle

SPUN Details

Fund Ticker SPUN  
Commencement Date 6/09/2015
Gross Expense Ratio1   5.91%
Net Expense Ratio1   0.55%
Distribution Frequency Annually
Index Ticker GSPIN  
Index Rebalancing Quarterly
 
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Emerging Markets Local Currency Bonds: A Market to Revisit http://www.vaneck.com/blogs/etfs/emerging-markets-local-currency-bonds-a-market-to-revisit-may-2016/ Van Eck Blogs 5/2/2016 12:00:00 AM

Authored by William Sokol, Product Manager, ETFs

Emerging markets ("EM") government bonds, particularly those denominated in local currencies, have bounced back in 2016. It's time to look again at what they can offer.

The past few years have not been kind to EM local currency bonds. Falling commodity prices and concerns about slowing global growth resulted in weak performance across many EM asset classes. Local currency bonds were particularly impacted by the robust U.S. dollar, which remained strong throughout 2015, and the prospect of four potential Federal Open Market Committee rate hikes in 2016. These headwinds caused investors to push valuations down to levels of extreme weakness, particularly on several EM currencies, which may have been oversold heading into 2016.

Q1 Tailwinds Provide Support

However, the Federal Reserve's sentiment may have changed. The Fed appears to be taking a more dovish stance and the market is now expecting fewer rate hikes this year. Some immediate results could include a pullback in the U.S. dollar and the re-emergence of a risk-on appetite. These tailwinds have been strengthened by the first quarter rebound in commodity prices and the prospect of pro-growth political reform in several EM countries.

EM local currency bonds benefited from these supportive factors, which contributed to a return of 11.02% in the first quarter, as represented by the J.P. Morgan GBI-EM Diversified Index, significantly outperforming EM hard currency sovereign bonds and corporates. Every country in the index had both positive local bond market returns and currency appreciation for the period. Dedicated local currency funds also received significant inflows towards the end of the quarter.

Positive Flows as Investors Take Notice

Why the positive flows? After years of volatility and weak performance, EM local currency bonds may be underrepresented in many investors' portfolios. In addition to market conditions being favorable in the first quarter, local currency bonds have some particularly attractive characteristics that stem from two distinct sources of return they provide: local interest rates and currencies.

Because of these distinct drivers of return, local currency EM bonds have exhibited low historical correlations with other segments of the fixed income market, especially core U.S. investment grade sectors, as shown below. Local currency EM bonds have also historically provided higher yields versus other EM bond sectors, with an investable universe that tends to be skewed more towards higher quality issuers. For example, 84% of local currency EM government bonds were rated investment grade at the end of the quarter, versus 63% of those denominated in hard currencies, as measured by the BofA Merrill Lynch Emerging Markets External Sovereign Index.

Low Correlation to Certain U.S. Fixed Income Sectors
As of March 31, 2016
 

 
Source: Morningstar.

 

Historically Higher Yields Versus Other EM Sectors
As of March 31, 2016
 

 
Source: FactSet. Index performance is not illustrative of fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com/emlc.

 

These unique drivers of return are also sources of risk, and should be considered along with credit, economic, political and other risks associated with EM investments.

We believe that local currency EM bonds may potentially provide unique diversification benefits within a global fixed income portfolio, with both potentially higher yields and higher credit quality versus other EM fixed income sectors. For investors who have reduced their exposure in recent years, we believe it is a market worth revisiting.

Investors interested in this space may find easy access to local currency denominated bonds issued by emerging markets governments through VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC).


 
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Investment Outlook: Commodities Stand Out http://www.vaneck.com/blogs/market-insights/investment-outlook-commodities-stand-out-april-2016/ Van Eck Blogs 4/27/2016 12:00:00 AM

Wednesday, April 27, 2016

Watch Video Video - Investment Outlook: Commodities Stand Out  

Jan van Eck, CEO, shares his investment outlook.

Watch Now  




TOM BUTCHER: Jan, commodities have seen a rebound in 2016. What's your outlook for the rest of the year?

JAN VAN ECK: We're very happy about the first quarter rebound. We do think commodities have bottomed and there are a couple of factors to consider. What we always stress, because I think it's the most important thing for people to understand, is the supply response. We think there has always been a growing demand for commodities around the world, whether it's energy, natural gas, oil, or metals, such as copper. What caused prices to fall was an oversupply situation, which we think has been corrected. We're glad to see that demand has caught up with supply.

I think the way for investors to think about this current environment is to consider this as an opportunity if one takes a much longer term perspective. We investors tend to be very focused on the short term. Energy is now very low as a percent of the overall S&P 500® Index. At its peak it was close to 16% and it's near 6% now. Taking a multi-decade perspective tells us that energy is relatively cheap right now. Similarly, if you look at gold shares over a longer period of time, you may see that while they've risen a great deal this year, they may still have much further to go because they fell so far.

My Message to Investors: This is a Great Opportunity

That is my number one message to investors: This is a great longer term opportunity. Don't obsess about the correct entry point.

BUTCHER: But global growth has been slow, debt levels have been high, and some governments have actually resorted to negative rates.

VAN ECK: We've seen this year a real inflection point, as Japan brought some of its interest rates negative. The question is how do you get economic growth going? After the financial crisis in the U.S., we had the same response: zero interest rates to try to stimulate economic growth. I think central banks are now basically taking it to the next level, i.e., negative interest rates. Federal Reserve Chair Janet Yellen spoke about this in her recent testimony, and former Fed Chair Ben Bernanke has been speaking about negative interest rates as well.

Negative Interest Rates May Cause Investors to Disengage

We think negative rates can be dangerous. Rather than stimulating the economy, negative interest rates, I believe, can cause people to withdraw from participating. Think about it from an investor's perspective. It is very worrisome when a bank will only give you 99 cents at the end of the year when you gave it a dollar in January. I think that can make people take less risk rather than engage in order to help stimulate growth.

Negative interest rates are fantastic for gold because gold doesn't pay a coupon, unlike bonds or stocks that pay dividends. Gold always has to compete with other financial assets but if financial assets are costing you money in a negative interest rate environment, we see no reason not to own gold. We think that's one of the reasons why gold has been rallying this year.

China's Consumer-Driven "New" Economy: Exciting, Yet "Lumpy"

BUTCHER: What are your views on China?

VAN ECK: China is the second largest economy in the world and we think that every investment committee needs to have a view on China. Our view has been that, while there are some growing pains, and the devaluation of the renminbi was a major event last year, there are no systemic risks [i.e., risks inherent to China's entire economy, rather than a single segment of the economy].

One of the things that we love to talk about is new China versus old China. New China is characterized by the consumer-driven and healthcare sectors; old China is steel, coal, and heavy manufacturing. Old China is continuing to face profitability issues. Another matter that we've recently been discussing is the growth of China's overall debt levels, which are particularly concentrated in old China. There is between $1 to $2 trillion of bad debt in China right now. China's economy amounts to $10 trillion and its overall debt level is approximately $20 trillion. These are large numbers. However, not every bad debt goes to zero, but the bad debt is very concentrated in the old economy sectors.1  

We don't think that causes a systemic risk but it may cause lumpiness in the performance of some of China's financial assets. Because various regions will be badly affected, people who have fixed income exposure to those regions will likely be badly impacted. There are likely to be some defaults. Still, we think it's a good thing because it's a healthy process.

What's Changed in our Outlook Since January

BUTCHER: Jan, you described your outlook at the beginning of 2016. How has it changed since January?

VAN ECK: Several important things happened in the first quarter. First of all, we thought that credit was very cheap, meaning interest rates had risen on MLPs [master limited partnerships] and on high yield bonds, which were almost showing signs of distress. We also said that this represented a great investment opportunity. In fact, high yield has outperformed the U.S. equity market2. Right now, I think that high risk bonds are a little less appealing today than they were when we first started the year.

Commodities Q1 Rally Creates Positive Inflection Point

Additionally, I think the equity markets still have a lot of struggling to do because price-to-earnings ratios are very high. Earnings fell last year in the U.S. They should be recovering now, looking forward over the next 12 months. Part of the reason is the strong U.S. dollar. Overall, we think equities are so-so and the U.S. economy, as well as the global economy, will muddle along.

Commodities were the big story in the first quarter. They dragged up other asset classes. For example, they helped emerging markets debt; they've helped Latin America. A good amount of high yield U.S. debt was energy-related, and it has rallied tremendously. It is interesting that what can be characterized as a bottom-up phenomenon of supply cuts kicking in within the commodities sector has helped other asset classes from a macro perspective.

Overall, we believe that commodities are the standout from a multi-year view. This is a great time for investors to look at them, given that we believe this is an inflection point.

BUTCHER: Thank you very much.

 
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China’s “New” Economy is Official http://www.vaneck.com/blogs/etfs/china-new-economy-is-official-april-2016/ The idea that China is redefining the nature of its economy has become a familiar economic theme. Recent developments strengthen our conviction that the emergence of China's "new" economy is more than a mere concept or official policy; it's a reality.

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Van Eck Blogs 4/26/2016 12:00:00 AM

Authored by James Duffy, Product Manager, ETFs

While the idea that China is redefining the nature of its economy has become a familiar economic theme, it may not be unanimous among market participants that the transformation is indeed imminent. Recent developments, however, strengthen my conviction in the "new" economy future of China and the role of the SME (Small and Medium Enterprise) and ChiNext Boards in facilitating the growth at hand.

Only last month on March 16, China's National People's Congress approved the 13th Five-Year Plan that the Communist Party presented back in October 2015. The remarks of the Chinese Premier Li Keqiang in announcing the new plan further inspire my enthusiasm: "China has initiated the concept of 'new economy' to foster new growth drivers for overall economy transformation." His subsequent statement is even more auspicious: "The campaign of mass entrepreneurship and innovation provides a platform for large, medium and small businesses and research institutions to have a broad space for crowd innovation, crowdfunding and crowdsourcing."

New Government Policies are Extremely Supportive

Though this news may not sound entirely new, given a similar announcement made in early February by top economic planner Shen Zhulin, we believe the premier's imprimatur will effectively underscore and publicize the seriousness of the administration's intent to transition from its "old" economy to the "new" one. There are more than "2,000 supportive policies for new businesses from central and local authorities" supporting our view that China means business.

Providing access to 1,282 of China's 2,828 A-share listed companies, the SME and ChiNext Boards of the Shenzhen Stock Exchange are crucial players in China's economic evolution, though the number of new enterprise registrations in China (4.4 million in 2015 or a whopping 12,000 a day) far exceeds the breadth of these two platforms. The SME Board, which now serves 782 listed companies, was inaugurated on May 27, 2011 with the objective of "supporting innovation" with "many high quality innovative issuers."1 Alongside it in Shenzhen, the ChiNext Board (totally independent from the main board) aims to provide "solid support for the development of independently innovative enterprises." We see the two boards as delivering on their promises; they represent big steps in China's establishment of "a multi-tiered capital market system" and offer exposure to the businesses that have driven the majority of recent technological innovation and "new" economy growth in China. Arguably these companies provide some of the most convenient access to the drivers of China's new economy.

The Transition from "Old" to "New" is Well Underway

While the transition from an "old," production-driven model to the "new," consumer and service-led economy will certainly not occur overnight, there are some notable indications that it is well underway. During the first two months of the year, state-owned enterprises saw profits fall 14.5% year-over-year while privately owned enterprises grew profits 5.4% during the same period. Furthermore, companies listed on the SME and ChiNext Boards experienced bottom line growth of 32% and 46% year-over-year, respectively. The IT, consumer discretionary, and healthcare sectors that characterize the "new economy" all saw double digit percentage increases in profit growth as compared to 2015 performance. The emergence of the "new" economy is more than a mere concept or official policy; it is, in my opinion, already coming to fruition.2

CNXT Gives Investors Access

Participating in China's potential growth is possible via several VanEck ETFs that provide differentiated access to the Chinese capital markets. In particular, Market Vectors® ChinaAMC SME-ChiNext ETF (NYSE Arca: CNXT) seeks to track an index that is designed to hold the 100 largest and most liquid China A-share stocks listed and trading on the SME and ChiNext Boards of the Shenzhen Stock Exchange.

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Munis: Muni Market is Generally Healthy Despite Some Headlines http://www.vaneck.com/blogs/muni-nation/muni-market-is-generally-healthy-despite-some-headlines-april-2016/ Van Eck Blogs 4/25/2016 12:00:00 AM Regardless of the headlines you may read about municipalities such as Flint, Michigan, Chicago, Illinois, Atlantic City, New Jersey, or Puerto Rico, I believe the municipal market is in good shape.

Yes, there are some cities, states, and territories facing a number of issues. And, yes, current low oil prices are having an impact. Still, according to data from Moody's Investors Service, the rate of defaults in the municipal market has been slower in 2016 than it was in the last three years.1

The rate of impairments has also declined. As Tom Doe, President of Municipal Market Analytics, informed us in a webcast recently: "While we have these headlines, it is also good to know that these issues are not manifesting broadly throughout the market."

The unfortunate thing about negative headlines, however, is that they can unnerve municipal investors as a whole, as they did in 2013. Such credit headlines, combined with interest rate concerns, can drive individual investors out of the asset class, sometimes unnecessarily.

Please note that municipal investments usually don't default or encounter serious problems in paying interest overnight. In many instances, the trouble of a particular municipal issuer or issue will raise its ugly head early on, long before it has a direct impact on investors.

This doesn't mean that the municipal bond market is simple or easy to navigate. It is complex and requires in-depth knowledge and analysis. These are two of the many reasons why I believe muni ETFs have become popular. They provide investors with an easy way to buy and sell — intraday just like a stock — products that are managed by professionals and that offer broad diversification with low fees.2 However, due to market action, ETF shares may trade a premium or discount. It's also important to remember that ETFs, are subject to the same risks as the underlying securities.

For many investors, muni ETFs may make sense as a way to access the tax-exempt income in an asset class that has historically been uncorrelated to the stock market.

Post Disclosure

1 Through 3/31/2016.

2 According to Morningstar as of 3/31/2016, VanEck's municipal ETFs had an average expense ratio of 0.44% versus an average net expense ratio of 0.92% for mutual funds in the Morningstar Municipal Bond U.S. Category Group. Diversification does not assure profit nor protect against loss.

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Munis: Muni ETFs in a Portfolio http://www.vaneck.com/blogs/muni-nation/muni-etfs-portfolio-april-2016/ Van Eck Blogs 4/20/2016 12:00:00 AM Using ETFs to access the muni market can make it easier to maintain an appropriate and more comfortable level of risk in one's "core" allocation than using individual muni bonds. Muni ETFs may also open up possibilities to take on incremental risk in a more liquid and broadly diversified way. Most portfolio strategists recommend that the majority of a fixed income allocation consist of exposure to investment grade bonds, with exposure to high yield (non-investment grade bonds) limited to a subset of one's fixed income allocation.

Investors may find using duration a more helpful guide to interest rate risk than maturity date. The tables below illustrate the durations of VanEck muni ETFs, as well as correlations, as a reminder that the benefits of diversification can vary, depending on the objectives and characteristics of each ETF.

The five ETFs in this first table may be a good way to start or replace some core fixed income exposure.

VanEck Muni ETFs for the Core

ETF Name Ticker Duration to Worst 30-Day SEC Yield 12-Month Yield Yield to Maturity Correlation to S&P 500® (based on market price, calendar year 2015)
Market Vectors Pre-Refunded Municipal Index ETF PRB 2.45 0.75% 0.82% 0.88% -0.25
Market Vectors AMT-Free Short Municipal Index ETF SMB 2.76 0.94% 1.13% 1.04% 0.13
Market Vectors AMT-Free Intermediate Municipal Index ETF ITM 6.11 1.78% 2.24% 2.55% -0.44
Market Vectors AMT-Free Long Municipal Index ETF MLN 6.41 2.69% 3.25% 3.85% -0.17
Market Vectors CEF Municipal Income ETF XMPT 12.88 4.88%1 4.93% -- -0.13

Click for standardized performance.
The performance data quoted represents past performance. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate. An investor's shares, when redeemed, may be lower or higher than the performance data quoted. Current performance may be lower or higher than the performance data quoted.

Characteristics source: VanEck as of 4/8/16. Correlation source: FactSet as of 12/31/15.
1In the absence of temporary expense waivers or reimbursements, the 30-Day SEC Yield for Market Vectors CEF Municipal Income ETF would have been 4.64% on 4/8/2016.

Investors seeking incremental income or those who are comfortable with lower credit quality may wish to consider supplementing their core holdings by using SHYD, HYD, or XMPT. Using an ETF for the higher risk portion of one's fixed income allocation provides very broad diversification as well as intra-day liquidity. However, it’s important to remember that diversification alone does not necessarily assure a profit or a loss. Also ETF's may cost more or sell for less than their net asset value.

VanEck Muni ETFs for Incremental Income

ETF Name Ticker Duration to Worst 30-Day SEC Yield 12-Month Yield Yield to Maturity Correlation to S&P 500 (based on market price, calendar year 2015)
Market Vectors Short High-Yield Municipal Index ETF SHYD 3.61 3.42% 3.23% 4.23% 0.04
Market Vectors High-Yield Municipal Index ETF HYD 6.47 4.18% 4.59% 5.22% 0.05
Market Vectors CEF Municipal Income ETF XMPT 6.47 4.88%1 4.93% -- -0.13

Click for standardized performance.
The performance data quoted represents past performance. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate. An investor's shares, when redeemed, may be lower or higher than the performance data quoted. Current performance may be lower or higher than the performance data quoted.

Characteristics source: VanEck as of 4/8/16. Correlation source: FactSet as of 12/31/15.
1In the absence of temporary expense waivers or reimbursements, the 30-Day SEC Yield for VanEck Vectors CEF Municipal Income ETF would have been 4.64% on 4/8/2016.

XMPT is included in both tables due to its unusual characteristics; because the leveraged closed-end funds in which it invests are generally over-collateralized, exposure to credit risk may be greatly reduced. However, because of the leverage employed by the underlying funds, there is greater interest rate risk. Prudent investors might use it for a portion of the long duration part of the core of their portfolios or to supplement or supplant their high yield allocation.

Conclusion

Because of the changes and challenges in the municipal bond market and the exchange-traded liquidity available via ETFs, even experienced investors may find that they can more easily tailor a diversified portfolio with a mix of muni ETFs than with individual bonds.

Patrick Luby is a Fixed Income Portfolio Strategy Specialist and the author of www.IncomeInvestorPerspectives.com. He has been helping many of the industry's best advisors and their investor clients understand and navigate the municipal bond market since the weekly Bond Buyer Municipal Bond Index was at 9.48%. (That's a long time ago, as most bond buyers know!)

This is not a recommendation to buy, sell, or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal, or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics, or individual investments.

Post Disclosure

If your financial plan provides a recommended asset allocation mix, compare the duration of the fixed income benchmark used to determine your mix against your proposed ETF. Using a lower duration ETF than the benchmark could be a less effective diversifier. Conversely, an ETF with a higher duration should bring greater non-correlating performance than modeled in your plan. Duration is the estimated percentage change of the price of a security for an immediate 1% change in rates. An ETF with a duration of 5.0 would be expected to decline in market value by 5% if rates immediately moved higher by 1%. The reverse would also be true—if rates decline by 1%, then that security would be expected to move higher in value by 5%. Duration to Worst measures the duration of a bond computed using the bond's nearest call date or maturity, whichever comes first. This measure ignores future cash flow fluctuations due to embedded optionality. 30-Day SEC Yield is a standard yield calculation developed by the Securities and Exchange Commission that allows for fairer comparisons primarily among bond funds. It is based on the most recent 30-day period. This yield figure reflects the interest earned during the period after deducting the Fund's expenses for the period. It does not reflect the yield an investor would have received if they had held the Fund over the last twelve months assuming the most recent net asset value (NAV). 12-Month Yield is the yield an investor would have received if they had held the fund over the last 12 months assuming the most recent NAV. The 12-month yield is calculated by summing any income distributions over the past 12 months and dividing by the sum of the most recent NAV and any capital gain distributions made over the past 12 months. Yield information reflects temporary waivers of expenses and/or fees. Yields would have been reduced had these fees/expenses been included. Yield to Maturity is the annualized return on a bond held to maturity.

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Fundamentals Return to Emerging Markets http://www.vaneck.com/blogs/emerging-markets-equity/fundamentals-return-to-emerging-markets-april-2016/ Experience informs us that this type of environment will rarely persist for long before rational fundamentals reassert themselves and investments in quality companies with genuinely sustainable operating profitability and attractive valuations reassert their leadership.

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Van Eck Blogs 4/18/2016 11:47:15 AM This past quarter has been one of more twists and turns in macro factors than we can, perhaps, remember. Commodities went from being some of the worst performing and under-held assets in January to the complete opposite in February and March. The Federal Reserve has "walked back" from its previous more hawkish interest rate projections and, as a result, the U.S. dollar declined dramatically. This has taken the pressure off some of the weaker emerging markets currencies, which have seen impressive rallies. It appears that many emerging markets investors have rushed to sell popular investments in India and China to return to more globally cyclical driven markets, companies that have benefited from the rebound in commodities, and higher beta currencies. This caused significant performance idiosyncrasies among countries in the emerging markets complex in the first quarter.

1Q 2016 EM Equity Strategy Review and Positioning

We believe long-term followers of our strategy will understand that panic followed by euphoria rarely provides a favorable backdrop for outperformance by our highly disciplined all-cap strategy, as both size and growth characteristics tend to be penalized in short periods of panic. Poor quality and cyclical factors, which our strategy generally avoids, tend to outperform everything in the first innings of euphoria. It is important to point out that the cause of our potential underperformance during these short periods is often due to what we do not own (i.e., what we deem to be very large, poor quality cyclical companies) as much as it is indicative of what we do own — you might think of it as partial giveback of our previous outperformance.

Financials and Consumer Staples Provide Boost; Industrials and Tech Detract

During the first quarter of 2016, stock selection in financials and consumer staples aided performance relative to the MSCI Emerging Markets Index1 benchmark, while selection in industrials and information technology detracted. The absence of allocations to the energy and materials sectors also hurt the strategy's relative performance.

On a country level, China was the main detractor from performance followed by Russia and India. Peru, the Philippines, and Colombia gave the strategy's relative performance a boost.

1Q Top Performers

The top five performing companies in the strategy came from around the globe. BB Seguridade Participacoes SA2, the insurance arm of Banco do Brasil, the largest Latin America-based bank, as a Brazilian real holding, was helped significantly by the rebound in the Brazilian market during the quarter. It's a structural growth story. The company continues to display strong execution, in line with our growth thesis. In addition to its improving asset quality, consistent performance, and asset growth, Peruvian financial holding company Credicorp3 benefited from the turnaround in the Peruvian market. This followed the second half of 2015 when uncertainty as to whether the country would be reclassified by MSCI indexers weighed heavily on its stocks. Yes Bank4, a high-quality, private sector Indian bank, benefited from both improving loan growth and widening lending spreads. These have resulted in significant results, as has the bank's focus on retail, as opposed to commercial, business opportunities. The stock price of Robinsons Retail Holdings5, the Philippines' second largest multi-format retailer, made up most of its decline from the last quarter after full-year 2015 results came in largely in line with consensus, backing up our growth thesis. Although a global leader and structural growth story in its own right, Taiwan Semiconductor Manufacturing Company6, the undisputed global leader in integrated circuit (IC) manufacturing, also benefitted from cyclical factors in the first quarter. There were earnings upgrades driven by greater short-term visibility and asset utilization from improved traction with key customers. Additionally, there was a multiple lift as investors also favored businesses that benefited from global cyclical tailwinds.

Chinese Stocks Suffer in 2016

Given that Chinese stocks suffered during the quarter, it is perhaps not surprising that four of the five biggest detractors from our strategy's performance were Chinese. Following a slight change in its business model, Chinese company Boer Power Holdings7, which provides electrical distribution solutions, is facing, in our opinion, increased business risk. The company's leverage increased as it took on higher levels of accounts receivable. We continue to believe, however, that the company will continue to be a beneficiary of the development of a smarter grid in China. Luxoft Holding8 is a high-end information technology services provider, primarily to the financial services industry, with its programmers largely situated in the ex-Soviet Union countries, which are referred to as Commonwealth of Independent States (CIS). During the quarter, the company reported lower than expected numbers, largely related to the pulling of a key contract by a client. Chinese company Wasion Group Holdings9, like Boer Power Holdings, is in the business of improving the efficiency of power use, an area of activity we still believe displays convincing fundamentals. The company is setting the standard for "smart" electrical grid meters in the country. During the quarter, however, it suffered from the fallout created by the adjustment and lengthening of payment timelines on certain government contracts. Along with a number of others, JD.com10, one of the Fund's internet holdings, suffered from the widespread exit from the Chinese market during the quarter, giving back some of its outperformance of the previous year. However, the company continues to reflect, in our opinion, the considerable strength of the growth opportunities in the e-commerce sector in China. CAR Inc11 is the largest auto rental company in China and provides vehicles to U-Car, a partner providing "Uber-like" chauffeured car services in China. The issues around this company, and its recent poor performance, center on uncertainty surrounding the regulatory environment that has led U-Car to scale back its investment, and thus use fewer CAR Inc vehicles. We are monitoring this situation closely.

We Don’t Respond to Short-Term Macro Events

As we always strive to emphasize, we are fundamentally a bottom-up strategy, first and foremost. However, we do like to give a sense of where the strategy is positioned in terms of country and sector. Please bear in mind that a higher weighting in a country may not necessarily mean extra exposure to that country's risk, as certain holdings may be negatively correlated to the local currency or positively correlated to local rates.

Because we don't respond to shorter-term macro events such as oil and Brazilian politics, our weightings do not tend to move as materially as those of many of our peers. We simply don't speculate on short-term movements or cyclical factors — we invest in well-researched, long-term structural growth businesses at attractive valuations. We maintain that this process and philosophy have historically returned and, we hope, may continue to return, what we consider pleasing long-term performance. However, our long-term performance may be punctuated by short periods when the asset class underperforms for mostly technical reasons.

We continue to be overweight in China, India, and Brazil, while still significantly underweight in South Korea. Taiwan still has a relatively light weighting, although it is home to a couple of our larger positions. South Africa is still also underweight, but less so than in prior years, as weakness in the rand has encouraged us to make further investment in domestically-oriented companies, while outperformance of Naspers12 has also increased our weighting in the country.

Healthcare and Financials Offer Structural Growth Opportunities

By sector, we have maintained the persistent biases that you can expect from our philosophy of structural growth at a reasonable price. Energy and materials are very difficult places for us to find good, persistent growth, while much of the telecommunication and utility sectors are not showing us much growth at all. Consumer staples, a natural area to look for structural growth, has largely proven to be too expensive for our taste in the last few years, and this remains the case.

We remain overweight in healthcare, clearly a long run structural growth industry as consumers in emerging markets dedicate a higher percentage of their increasing disposable income to healthcare spending. Financials remain a large weighting for the strategy, but the investments we choose in this sector are very specific, usually by country, and focus on persistent structural trends such as microfinance, "banking the unbanked" and specialty insurance.

Emerging Markets Outlook

Experience informs us that this kind of environment rarely persists for more than a quarter or two before rational fundamentals reassert themselves and investments in quality companies with genuinely sustainable operating profitability and attractive valuations reassert their leadership. In a more "normal" environment, our strategy has historically tended to do quite well in our estimation.

Eyeing Brazil with Interest

We are watching Brazil with great interest. The political situation there remains extremely fluid. The incumbent socialist administration looks increasingly likely to be replaced by a more market friendly, reformist coalition. This expectation has resulted in a sharp recovery in current share prices and the country's currency. We steadily increased positions throughout last year because valuations became more and more attractive and have been somewhat rewarded for this — only somewhat, because the rebound has been led, so far, by large-cap commodity names such as Petrobras and Vale14, which do not align with our structural growth at a reasonable price (SGARP) philosophy and process.

Lower But Better Growth in China

China began the year with very negative headlines centering on the likelihood of a sharp depreciation of its currency and fears of an imminent debt-fueled crisis. We, on the other hand, continue to expect lower but better growth, monetary and fiscal easing, and a gradually weakening renminbi, but no crisis. Our base case is for modest cyclical recovery in China's economy in the first half of 2016 that could allow more room for further significant structural reforms, with more emphasis on the supply-side of the economy, rather than attempts simply to "juice up" demand. We do believe, however, that more credit "issues" are likely as the tidying up of highly indebted, state owned entities continues. As we regularly remind emerging markets investors, our strategy has very little exposure to the old, smokestack/state-owned enterprise (SOE) complex13, and we continue to favor long-term, structural growth opportunities in environmental services, internet, healthcare, tourism, and insurance.

Performance Led by Technicals in India

India was the other market where we experienced some negative performance over the quarter. Again, we would make the case that this was partly for technical reasons related to positioning. We remain optimistic about the Indian companies in which the strategy is currently invested, despite the country falling out of favor in relative terms.

Accelerating Growth in Peru

After several months facing a challenging scenario with lower commodity prices, the outlook for Peru started to improve. Growth in the country has been accelerating, driven by the mining and infrastructure sector. There is uncertainty regarding the outcome of the presidential election. It seems that the most likely scenario is that Keiko Fujimori will win in the second round. Finally, there seems to be a consensus view that Peru has a big chance of avoiding MSCI reclassification to Frontier Market which could act as an additional driver to Peruvian equities.

Can Colombia Tough Out Low Oil Prices?

Colombia continues to be negatively affected by the low level of oil prices, the uncertain fiscal adjustment, and expectations for the peace process. In our view, the government needs to approve a fiscal reform in order to address some important topics that will allow the country to achieve its fiscal target amid lower prices and low level of reserves. The government is waiting for the completion of the peace process to have the necessary political capital to proceed with an honest fiscal reform (this will be decisive to preserve the sovereign rating). There will likely be some slowdown in activity in 2016 with GDP growth expectations of around 2.7% versus 3.1% in 2015. There are some factors such as the beginning of the 4G mobile technology infrastructure program and the positive reaction of some tradeable sectors to a higher exchange rate that should partially offset the tough scenario for the economy given currently low oil prices.

We Believe Structural Growth is Reliable and Sustainable

In general, we see valuations for our focus list companies, after the recent rally, as fair, without being materially cheap. As we noted at the end of 2015, we are now seeing, as expected, some better economic numbers out of China, which is a notable bright spot. In addition, we would also point out that the growth of our strategy has been structural in nature and, arguably, quite reliable; as such, we expect it to compound over the course of time, with little cyclical risk associated with the world and market volatility we live with today.

 

Download Commentary PDF with Fund specific information and performance»  

Post Disclosure  

1 The Morgan Stanley Capital International (MSCI) Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries. With 836 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. This index is unmanaged and does not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in specific investment Fund. An index's performance is not illustrative of a Fund's performance. Indices are not securities in which investments can be made.  

For a complete listing of the holdings in Van Eck Emerging Markets Fund (the "Fund") as of 3/31/16, please click on this PDF. Please note that these are not recommendations to buy or sell any security.  

2 BB Seguridade Participacoes SA represented 3.2% of the Fund's net assets as of 3/31/16.  

3 Credicorp represented 2.4% of the Fund's net assets as of 3/31/16.  

4 Yes Bank represented 2.4% of the Fund's net assets as of 3/31/16.  

5 Robinsons Retail Holdings represented 2.2% of the Fund's net assets as of 3/31/16.  

6 Taiwan Semiconductor Manufacturing Company represented 2.5% of the Fund's net assets as of 3/31/16.  

7 Boer Power Holdings represented 0.6% of the Fund's net assets as of 3/31/16.     

8 Luxoft Holdings represented 1.6% of the Fund's net assets as of 3/31/16.  

9 Wasion Group Holdings represented 0.7% of the Fund's net assets as of 3/31/16.  

10 JD.com represented 3.1% of the Fund's net assets as of 3/31/16.  

11 CAR Inc represented 1.5% of the Fund's net assets as of 3/31/16.  

12 Naspers represented 3.4% of the Fund's net assets as of 3/31/16.  

13 State-Owned Enterprise (SOE) is a legal entity created by a government with the purpose to partake in commercial activities on the government's behalf.  

14Petrobras and Vale were not held by the Fund as of 3/31/16.  

 

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Marketplace Lending: LendIt 2016 Learnings http://www.vaneck.com/blogs/market-insights/marketplace-lending-lendit-2016-learnings-april-2016/ ]]> Van Eck Blogs 4/18/2016 10:04:13 AM

Last week representatives from VanEck attended the LendIt USA Conference in San Francisco, the largest gathering of industry thought leaders in the online lending community, including leading platforms, investors, and service providers. We heard from many participants a mix of good and challenging news, and came away from the event feeling that fundamentals remain solid. As evidenced by the event's strong turnout, the industry continues to grow and attract capital and interest.

I have just returned to NYC from San Francisco, where I attended the LendIt USA 2016 Conference. Having been lucky enough to see the Broadway hit "Hamilton" recently, I thought on the plane flight back east that our "$10 founding father" would have been mesmerized by, proud of, and likely taking some credit for the whirlwind of financial services innovation on display at LendIt.

As an investor in and advisor to several FinTech companies operating in the online lending ecosystem, I thought it might be useful to share a few of my "learnings" from this annual FinTech confab. I not only had the opportunity to speak on the Fund Manager Insights panel (thank you, Peter Renton and Jason Jones for the opportunity), but I also had the chance to listen to and meet with many industry experts, FinTech CEOs and executives, venture capitalists (VCs), investment bankers, and investors in marketplace loans.

While this blog post is assuredly not a data-driven synopsis of the event, it is important to start with one of the most salient event factoids: over 4,000 participants from over 20 countries attended #LenditUSA 2016, an increase of over 60% from the prior year. I believe that fact tells us much about this industry, which I believe continues to grow and evolve. 

LendIt Learning #1

I believe this bit of pith from one lending platform CEO summed up the general tone of the conference: "The hype-to-reality ratio is lower this year and more in line with where it should be."

Certainly, industry growth trends remain: new companies, new lending niches, internationalization of the business, and more origination by the established players. However, there is also a sense that this industry has serious issues with which to contend. Many of these were eloquently raised and discussed in Ron Suber's outstanding keynote address: troubled securitizations, rating agency downgrades, regulatory and legal (Madden v. Midland Funding) uncertainty, fraud headlines, lower public and private valuations, and meaningful competition from other alternative and high yield investments that seemingly and suddenly became more compelling relative to marketplace loans in the recent volatile markets. These issues have contributed to a sense that even though the industry trend is still clearly positive, it will not be a straight line. To most industry insiders, this seems healthy in the long run, provided the uncertainties noted above can be addressed.

LendIt Learning #2

Broader, deeper, more stable, and more diversified sources of funding are needed for the industry to scale and continue to grow at the rates of the last two years. Opening investor access to the category is one solution. Lending funds, transitional capital, and VC are all potential parts of the equation. Ultimately, I believe, pension funds, endowments, foundations, insurance companies, and other deep pools of long-term capital need to be tapped. 

But to win over these large, sophisticated investors, a major amount of Suber's "EAU" (Education, Awareness and Understanding) needs to take place. This will take time and, most importantly, solid loan performance through this current environment as well as through a truly weak credit cycle. The point is that the marketplace lending industry has to begin the long, often arduous process of talking to and creating funding partnerships with these institutions. Securitizations can certainly also be a part of the solution but as a recent securitization of loans shows, poorly executed deals can actually damage investor demand for loans and raise questions about pricing and credit quality. The best financial institutions have typically diversified their funding sources and the same is proving true with respect to online loan originators.

LendIt Learning #3

Borrower niches continue to be exploited. At LendIt I learned about real estate (commercial, residential, and "fix and flip"), automobile (prime and sub-prime), purchase finance at the point of sale (and online point of sale), and many different approaches to and types of small business loans. I think we will continue to see more and more niches attacked by entrepreneurs seeking to use the efficiencies gained from originating and underwriting loans using technology to undercut more traditional methods of credit extension. Whether these niche online lenders will be able to stand on their own as independent companies or will be consolidated into larger players remains to be seen. But these differentiated types of loans — some secured and some unsecured — offer investors a range of choices and I think this will be increasingly important to investors over time.

So congratulations to the organizers of LendIt 2016. Judging from the fact that it was announced that LendIt 2017 will be at the Javits Center in New York City (not what I would call an intimate venue!), a general optimism still pervades the industry. And given that optimism, I just want to know if the conference organizers are offering next year's LendIt participants tickets to Hamilton.

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Central Bank Policy Concerns Support Gold in March http://www.vaneck.com/blogs/gold-and-precious-metals/central-bank-policy-concerns-support-gold-in-march-march-2016/ ]]> Van Eck Blogs 4/14/2016 12:00:00 AM

For the month ended March 31, 2016

Gold reached a new high for the year of $1,285 per ounce on March 11 when the European Central Bank (ECB) announced its upcoming plans, which include reducing rates on overnight bank deposits by 10 basis points to -0.4%, expanding quantitative easing to include corporate bonds in addition to sovereign bonds, and adding a new series of bank loans. Gold's gain reflects investors' worries over the financial risk and currency debasement that may come with negative rates, more printing of money, and relatively easy credit. Bloomberg reports that in February sovereign bonds issued primarily in Japan and Europe worth more than $7 trillion in U.S. dollars had negative yields. Meanwhile, Gluskin Sheff1 calculates the average yield on $23 trillion of global sovereign bonds outstanding has dropped below 0.7% for the first time in history.

The Potential Risks of Negative Interest Rates

Some of the potential risks of negative rates include: 1) the fundamental framework of the financial system is simply not designed to operate with negative rates; 2) providers of long-term services, like pension funds and insurance companies, have trouble meeting goals and expectations; 3) currency relationships and valuations become impaired; and 4) investors may disengage from the financial system. Comments from central bank officials seem oblivious to the dangers that gold investors see in the radical policies that are being promulgated. For example, ECB President Mario Draghi has said that he will do whatever is necessary to revive inflation. International Monetary Fund (IMF) Managing Director Christine Lagarde claims that the world economy would be worse off without negative rates and, additionally, that the finance sector may need to implement new business models. Following the March 29 speech to the New York Financial Club by Federal Reserve (Fed) Chair Janet Yellen during which she stated that the Federal Open Market Committee (FOMC) would still have considerable scope to ease policy if rates in the U.S. hit 0% again, the market lowered its expectation for further Fed rate increases.

Gold Bullion Posted A Small Loss for March, While Gold Shares Were Strong

Overall for the month, gold trended lower from its March highs, ending the month at $1,232.71 per ounce for a small loss of $6.03 (0.5%). Gold shares reached their highs for the year on March 17 and the NYSE Arca Gold Miners Index2 (GDMNTR) gained 4.0% for the month. The junior gold stocks had been trailing the benchmark, however, but the Market Vectors Junior Gold Miners Index3 (MVGDXJTR) caught up with the GDMNTR for the year by outperforming in March with an 8.6% gain.

Gold ETPs Enjoy Record Flows in 1Q

The 300 tonne flow of gold into bullion exchange-traded products (ETPs) in the first quarter (1Q) was the largest quarterly inflow since 2009, a period of heightened demand due to the credit crisis. Despite these record ETP flows, other demand drivers have been lacking. Jewelers in India were on strike for three weeks in March to protest a tax increase. Bloomberg reports Chinese purchases of gold for the first two months of 2016 were down 56% from a year ago. The People's Bank of China (PBOC) raised its gold reserves by 10 tonnes in February, its smallest monthly increase since it began reporting gold holdings last year. Producer hedging, which involves selling, increased as we count seven companies that announced new hedge positions in the first quarter. This was entirely short-term tactical hedging to lock in profits for new start-ups, high-cost short-life mines, or mines in weak currency countries. The weak physical demand from Asia and increased hedging suggest that overwhelming investment demand, mainly from the West, has been a primary driver of the strong gold market this year.

Gold Enjoyed its Best Quarter Since 1986

This was the best quarter for gold performance since 1986 and gold stock gains were of a similar magnitude. In the first quarter, gold advanced 16.1%, while the GDMNTR was up 46.3% and the MVGDXJTR climbed 45.4%. These are the types of early gains we expected to see in a sector that has been radically oversold. Since gold crashed in 2013, short sellers have dominated the market with many banks calling for lower prices, making the bear market one of the worst ever. Now it looks like we will see how vulnerable the new market is. Inflows to bullion ETPs have slowed and Comex4 net speculative long positions are the highest since 2012. As of April 5, gold has declined $56 per ounce from its March 11 high and looks to be into its first significant consolidation of the year. Holding above $1,200 per ounce would be a very bullish sign. However, a more plausible expectation based on trends in the early stage of past bull markets would be a correction to around the $1,150 per ounce level. A fall below $1,100 per ounce would suggest the bears have regained the upper hand, although we see this as the least likely outcome.

Core Inflation in U.S. is Worth Watching

Although we haven't paid much attention to consumer price inflation5 (CPI) for decades, we believe it now merits watching. The era of disinflation that was punctuated by the deflation of the great recession may be coming to a close. Normally we prefer to include food and energy when evaluating inflation trends. However, because of the recent crash in oil prices, we believe it is important to strip out energy volatility to see what is happening with underlying core inflation. The chart below (Figure 1) highlights the rise in core inflation over the past 14 months that has the potential to form a new trend. The Fed has a dual mandate: full employment and consumer price stability. At 5% unemployment, it's generally considered that the labor market is at full employment. Except for the extraordinary crisis-driven deflation in 2009, the core CPI chart looks reasonably stable. Yet for some reason the Fed and other central banks are trying extremely hard to escalate inflation. They do not appear worried by the asset price inflation that easy money policies have brought to stocks, bonds, and real estate. In past cycles the Fed remained too easy for too long. This is looking like a cycle in which the central banks remain way too easy for way too long, in our opinion. Perhaps this cycle will be different from the ones that brought about the tech bust and subprime crash. In addition to the usual asset bubbles that inevitably burst, we might be adding an inflationary cycle in goods and services. There is a distantly familiar name for that in a low-growth world: stagflation.

Figure 1: Core Inflation Trending Upwards?

 

Source: Bloomberg. Data as of February 29, 2016.

A Welcome Sojourn to Gold Mines in the Australian Outback

Getting far away from a macroeconomic scene that might become quite depressing for those investors without investments in gold or gold shares, we spent time in the Australian outback looking at a number of gold properties. Australia is the second largest gold producer behind China, and ranks ahead of both Russia and the U.S. We haven't been to Australia in many years because much of the gold there has been produced by North American or South African majors who acquired many of the Australian producers 10 to 15 years ago. The Australian operations formed a smallish component of the global majors, which made it difficult to justify a 22-hour flight combined with 105°F heat on arrival. But recently, there has been a remarkable renaissance in mid-tier and junior producers in Australia made possible by: 1) the 28% fall in the Australian dollar (AUD) since 2013 that has reduced costs in U.S. dollar terms, 2) North American companies divesting non-core mines to help pay down debt, and 3) operational improvements and discoveries. Companies that a few years ago did not exist or were avoided, such as Saracen, Northern Star, and Newmarket Gold, are now in our portfolio.

One of the drawbacks of investing in Australian companies is their short mine lives. Reserve lives are typically five years or less. However, we have gained an understanding of the resource base and exploration potential of these properties that indicate true mine lives are closer to the 10-year time frame that is common internationally. Good management teams have mitigated the operating risks, which, we believe, leaves currency as the dominant risk facing these Australian companies. However, we view the rise of the Aussie dollar to parity with the U.S. dollar in 2011/2012 as the exception, brought on by a China-driven commodities boom that is not likely to repeat in our lifetimes. The currency collapse brings it closer to historic norms. From 1985 to 2005 the AUD averaged US$0.70, close to its current value of US$0.75.

Download Commentary PDF with Fund specific information and performance»

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Munis: Using Muni ETFs to Complement a Portfolio of Bonds http://www.vaneck.com/blogs/muni-nation/using-muni-etfs-complement-portfolio-muni-bonds-april-2016/ ]]> Van Eck Blogs 4/13/2016 12:00:00 AM For municipal bond investors, life has gotten more difficult — not less:

  • Persistent low rates have driven some investors to take on more concentrated duration or credit risk than they may be comfortable with (or should be comfortable with) or hold fewer bonds.
  • Lingering concerns about creditworthiness have been compounded in some cases by an increase in political risk and as a result, an issuer may have the ability to pay its debt but may be less willing to do so.
  • Drastically reduced secondary market liquidity has made it more difficult (and expensive) to be nimble. In order to protect themselves should the need arise to sell bonds prior to maturity, some investors have restricted themselves to only the largest and most liquid bonds available, thereby limiting their ability to pursue incremental yield opportunities.
  • The dynamics of muni bond supply and demand are subject to seasonal imbalances, and this year the supply of new issue bonds is down over 8% versus 2015, while the upcoming " Summer Redemption Season" is expected to add over $100 billion in redeemed municipal bond principal to reinvestment demand, according to Bloomberg data.

Given these challenges, investors may wish to consider whether using muni bond ETFs as a complement to an existing portfolio may be easier and more efficient than using individual bonds as a way of maintaining an appropriate asset allocation mix and risk profile.

Because muni ETFs are managed to maintain a constant duration, the decision to reinvest can be made when it makes the most sense for each investor's goals—not just because bonds are maturing. For example, many investors have used a laddered portfolio strategy (in which equal amounts of principal are divided across sequential maturities) as an interest rate neutral way to manage their portfolio. (Interest rate neutral refers to the fact that a laddered portfolio favors neither a rise nor a fall in rates, as opposed to other strategies that may favor one interest rate environment over another.) Because a laddered portfolio has principal maturing on a regular basis, the investor is tasked with the need to reinvest the matured principal in order to keep the money working. If an investor's bonds are maturing in June, July, or August of this year, he may find himself competing against other investors for the limited supply of good quality and liquid bonds available in the market. A muni ETF may make sense as a short-term holding to maintain asset class exposure until a suitable replacement bond is found, or the ETF can be used as a longer term holding, replacing the matured "rung" on the portfolio ladder.

The easy to access intra-day liquidity for muni ETFs has attracted a variety of market participants who are not active in the underlying over-the-counter market for individual bonds. As a result, fluctuations in investor demand may not have as much of an effect on the volume of ETF trading as it may in the cash market. Investors must consider that due to market action, ETF shares may trade a premium or discount. (Read more about muni ETFs and liquidity here.)

Patrick Luby is a Fixed Income Portfolio Strategy Specialist and the author of www.IncomeInvestorPerspectives.com. He has been helping many of the industry's best advisors and their investor clients understand and navigate the municipal bond market since the weekly Bond Buyer Municipal Bond Index was at 9.48%. (That's a long time ago, as most bond buyers know!)

This is not a recommendation to buy, sell or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments.

Post Disclosure

The Bond Buyer Municipal Bond Index is based on prices for 40 long-term municipal bonds. The index is calculated by taking price estimates from Standard & Poor's Securities Evaluations for the 40 bonds, converting them to fit a standard 6% coupon, averaging the converted prices, and multiplying the result by a smoothing coefficient that compensates for the changes made twice a month in the index's composition.

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Russia: Land of Education and a Growing Tech Industry http://www.vaneck.com/blogs/efts/russia-the-land-of-education-growing-tech-industry-april-2016/ The Russian stock market, as measured by the Market Vectors® Russia Index (MVRSXTR), performed particularly well over the first quarter of 2016.

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Van Eck Blogs 4/13/2016 12:00:00 AM

Authored by David Feygenson, Senior Analyst, Emerging Markets Equity Strategy, and James Duffy, Product Manager, ETFs

Given Russia's need to diversify its economy away from both energy and basic materials, the country's technology and telecommunications industries — increasingly fueled by entrepreneurship among the country's well educated — offer considerable potential.

The Russian stock market, as measured by the Market Vectors® Russia Index (MVRSXTR), performed particularly well over the first quarter of 2016. Starting the year at 417.9, the Index ended the first three months of the year at 471.1 on March 31, an increase of 12.7%.

Much of this growth can be attributed to technology stocks. Of the 29 stocks that currently make up MVRSXTR, seven are involved in tech or telecom. In terms of market capitalization, these seven stocks make up approximately 17.5% of the overall market as defined by the Market Vectors® Russia Index.

Russia's Tech Growth is Fueled by a New Generation of Highly Educated Workers

Russia has one of the highest proportions of university graduates in the world, eclipsing levels in Asia, Europe, and North America. Partly due to the Soviet legacy of a focus on education, Russia is still endowed with an excellent education system that produces thousands of university graduates each year.

Source: Organization for Economic Cooperation and Development (OECD), "Education at a Glance 2015: OECD Indicators", for the year 2014, except for Russia, Chile, Saudi Arabia, and Brazil, which are for the year 2013.

Of young men aged 25-34, about half have completed tertiary education, much higher than the 35% average among OECD countries, and, after Korea, the second highest proportion. Of young women in the same age bracket, about 65% have completed tertiary education, much more than the 46% average for most OECD member and partner countries where data is available.

While some of Russia's best educated have left the country for greener pastures, many have remained and contributed to a growing tech industry. In recent years, a number of Russian technology companies have gone public, including Yandex (YNDX), the leading search engine in Russia, and Mail.Ru Group (MAIL), the leading portal, social networking, and gaming site in Russia.

Perhaps Russia's young and educated demographic will continue to foster a growing number of startups that will help to stake its claim as a global player in technology. The Russian market can be accessed through Market Vectors® Russia ETF (RSX®) and Russian small-cap companies through the Market Vectors® Russia Small-Cap ETF (RSXJ®). As of March 31, 2016, Yandex and Mail.Ru comprised 4.04% and 2.41% of RSX, respectively.

Source: FactSet, VanEck, and Market Vectors Index Solutions (MVIS).


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High Yield Recovers, Fallen Angels Soar http://www.vaneck.com/blogs/etfs/high-yield-recovers-fallen-angels-soar-april-2016/ Living up to their history of outperformance, fallen angel bonds (+6.54%) ended the first quarter having outperformed the broad high yield bond market (+3.25%) by 3.30%.

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Van Eck Blogs 4/11/2016 12:00:00 AM

Authored by Meredith Larson, Product Manager, ETFs

Fallen Angel Bonds Outperformed Broad High Yield in the First Quarter

Living up to their history of outperformance, fallen angel bonds (+6.54%) ended the first quarter having outperformed the broad high yield bond market (+3.25%) by 3.30%, as measured by the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA) and BofA Merrill Lynch US High Yield Index (H0A0).1 Fallen angels are high yield corporate bonds that are originally issued with investment grade credit ratings.

Heavier Allocations to Basic Industry and Energy Drove Positive Results

Relative to the broad high yield bond market, fallen angels' recent outperformance was primarily due to their higher average allocations to the basic industry and energy sectors. Both of these sectors' bonds appreciated in the first quarter, as oil prices recovered approximately 46% since mid-February.2


Chart 1. Year-to-Date Top/Bottom Three Sector Attribution
BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA) vs. BofA Merrill Lynch US High Yield Index (H0A0)

Source: FactSet. Data as of March 31, 2016. Past performance is no guarantee of future performance. Top and bottom three sector attribution of the BofA Merrill Lynch US Fallen Angel High Yield Index for fallen angels versus the BofA Merrill Lynch US High Yield Index for the broad high yield bond market. Figures are gross of fees, non-transaction based and therefore estimates only. Past performance is not indicative of future results. Attribution represents the opportunity cost of investment positions in a group relative to the overall benchmark.

2016 Energy Sector Bias

Over the first quarter, fallen angels' energy allocation grew from about 13% to 25%, while the broad high yield bond market's went from approximately 11% to 13%.3 The overweight bias occurred as a result of the energy sector’s struggles in 2015, which led to investment grade energy companies suffering credit deterioration being downgraded to high yield. Allocating to bonds that are under ratings pressure may be considered a contrarian investment approach, which has tended to work for fallen angels in the past. Fallen angels tend to price in a substantial amount of this risk ahead of the ratings downgrades and, in general, become oversold from institutional forced selling upon entering the (H0FA) index, creating a potential value proposition.

Higher Quality High Yield

Fallen angels are generally characterized by higher average credit quality than the broad high yield bond market. While fallen angel bonds currently have a higher allocation to the energy sector than the broad high yield bond market, energy fallen angels are diversified across industries and concentrated in bonds with BB-credit (below investment grade) ratings.

ANGL Outperformed Majority of Peers

VanEck Vectors® Fallen Angel High Yield Bond ETF (ANGL), which seeks to track the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), outperformed the majority of actively managed high yield bond funds over multiple time horizons since its April 2012 inception.4


Chart 2. Performance Relative to Peer Group
VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) vs. Morningstar Active High Yield Bond Universe
VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)
Source: Morningstar. Data as of March 31, 2016.
This chart is for illustrative purposes only. The performance data quoted represents past performance. Past performance is not a guarantee of future results. Performance information for the Fund reflects temporary waivers of expenses and/or fees. Had the Fund incurred all expenses, investment returns would have been reduced. Investment return and value of the shares of the Fund will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Performance current to the most recent month end is available by calling 800.826.2333 or on vaneck.com/etfs. VanEck Vectors Fallen Angel High Yield Bond ETF commenced on April 10, 2012. An investor cannot invest directly in an index. The results assume that no cash was added to or assets withdrawn from the Index. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown. The actively managed high yield bond category is represented by the Morningstar Open End Funds – U.S. – High Yield Bond category. See index descriptions below.

VanEck Vectors® Fallen Angel High Yield Bond ETF received a five-star rating from Morningstar, as of March 31, 2016.5 ANGL was rated against 646 funds in Morningstar's high yield bond category over the last three years, based on total returns. Past performance is no guarantee of future results. Additional resources and information on VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) »

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Sun Pharma Makes Acquisition in Japan http://www.vaneck.com/blogs/etfs/sun-pharma-makes-acquisition-in-japan-april-2016/ Generic drugs are gaining in prominence across the globe and manufacturers are capitalizing on potential opportunities to gain market share. This week SUNPHARMA announced a deal to acquire 14 prescriptions from Novartis (NVS) in Japan for $293 million.

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Van Eck Blogs 4/7/2016 12:00:00 AM

Authored by James Duffy, Product Manager, ETFs

The case for considering the investment merit of the generic drugs industry extends well beyond the borders of the United States and the jurisdiction of the U.S. Food and Drug Administration.

The Global Importance of Generics

Generic drugs are gaining in prominence across the globe and manufacturers are capitalizing on potential opportunities to gain market share. This week Sun Pharmaceutical (SUNPHARMA), one of the world's largest generic drug companies, announced a deal to acquire 14 prescriptions from Novartis (NVS) in Japan for $293 million. The acquisition will give Sun Pharmaceutical a foothold in Japan's $73 billion pharmaceutical market, which is currently ranked third largest in the world.1  

Governments Drive to Cut Costs

The deal positions Sun Pharmaceutical to take advantage of the Japanese government's health care cost reduction agenda, which includes plans to increase the percentage of prescriptions that are filled with generic drugs from 50% today to 80% by 2020.

Sun Pharmaceutical itself represents the global nature of the industry. Based in Mumbai, it is helping India's burgeoning pharmaceutical sector to augment its standing worldwide. Currently, SUNPHARMA comprises 4.75% of Market Vectors® Generic Drugs ETF (GNRX) as of 3/31/16.

 

 

 

View Current GNRX Holdings »   


 
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Munis: Utility and Sensibility http://www.vaneck.com/blogs/muni-nation/utility-and-sensibility-april-2016/ ]]> Van Eck Blogs 4/7/2016 12:00:00 AM I believe it is important for investors to step back from time to time, away from "the maddening crowd," and judge what is happening and how one is reacting to the markets from day to day. Why? Because it is human nature to get swept up by the volatility and excitement that the modern information age can offer, and in those instances we might lose sight of the pathways to the goals we set.

As we've moved into the second quarter of the year and nearer to the April 15 tax filing deadline, I want to make some simple points about the municipal bond asset class and the way it may behave going forward.

Although it is tempting to think of municipal bonds as a trading vehicle similar to corporate bonds, I suggest that it is better to view municipals as part of a long-term approach to portfolio construction that is geared to capture the potential benefits of tax exemption and relative value. Munis have remained resilient despite the impact of various headlines (Detroit, Puerto Rico) and their taxable equivalent returns have often rivaled — if not trumped — those of other asset classes.

Secondly, it is important to understand that seasonal shifts in supply and changes in the yield curve can impact a municipal bond's total return and present investors with tactical opportunities. For the first quarter, according to Barclay's, their Municipal Bond Index returned a positive 1.67%. Taking into consideration the seasonal supply/demand trends that have prevailed during the second quarter for the last 15 years suggest that favorable entry points may potentially become available. It may make sense for investors to consider remaining in tactical allocations to certain ETFs, for example, that are designed to capture pricing opportunities.

I recently discussed these factors in a webcast entitled, "Muni ETFs: the Potential Solution for Today's Wild Markets." For a more in-depth analysis of the current landscape for municipal bonds and municipal bond ETFs in particular, please listen to the replay.

Post Disclosure

The Barclays Capital Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.

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EM Growth Spots: LatAm and Turkey http://www.vaneck.com/blogs/emerging-markets-equity/growth-spots-in-latam-and-turkey-april-2016/ Patricia Gonzalez and David Feygenson, Analysts, Emerging Markets Equity, identify current growth spots in emerging markets:  Latin American credit and Turkish pension funds.

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Van Eck Blogs 4/5/2016 12:00:00 AM  

In this new video, Patricia Gonzalez and David Feygenson, Analysts for the Emerging Markets Equity strategy, identify two current growth spots in emerging markets: credit markets in Latin America (Mexico) and pension funds in Turkey.

Wednesday, April 5, 2016

Watch Video EM Growth Spots: LatAm and Turkey  

Gonzalez: "We see structural growth opportunities resulting from governmental reforms or policy changes that can allow new businesses and sectors to flourish. We're currently seeing this in Turkey, where several years ago the government announced private pension funds similar to 401(k)s in the U.S."

Watch Now  

Growth Spot: Funding SMEs in LatAm/Mexico

TOM BUTCHER: I'm here today with Patricia and David of VanEck's Emerging Markets Equity team to discuss exciting growth spots in today's emerging markets.

Patricia, can you tell me about one of your favorite growth spots?

PATRICIA GONZALEZ: I think we'll continue to see very good opportunities arise from the low level of credit penetration in the SME (small- and medium-sized enterprise) segment of Latin America (LatAm), particularly Mexico. We have seen that the lack of alternatives for this segment has left SMEs with very few options to rely on.

When we look at Mexico we see that the SME segment is extremely important. The majority of companies in the country fall within the SME segment. These businesses generate more than 50% of Mexico's GDP and also provide a majority of the country's employment. In our strategy, we try to take advantage of these opportunities through a company called Unifin.1 Unifin is the largest listed company in Mexico focusing specifically on SMEs. In our experience, the kind of lending that banks provide to SMEs is mostly lines of working capital. They are very short term and consequently we see a significant need and opportunity for the funding of fixed assets.

We believe that Unifin is very well-positioned to take advantage of that potential growth. With first-mover advantage, it has been in business for over 20 years and has developed a number of products and services for its clients. We feel it has a very good distribution network that has supported its growth and the company has been profitable. Its strict risk controls and leasing guarantees have allowed it to maintain good asset quality. When we look at management, we find the team has been in the business for a long time and has developed very strong know-how in the leasing market. Management has been able to meet clients' needs, which has contributed to increase market share. Finally, we think Unifin's valuation is attractive in terms of the company's growth and the returns it delivers.

Growth Spot: Private Pension Funds in Turkey

BUTCHER: David, what is your favorite growth spot in the emerging markets?

DAVID FEYGENSON: We see structural growth opportunities resulting from governmental reforms or policy changes that can allow new businesses and sectors to flourish. We're currently seeing this in Turkey, where several years ago the government announced private pension funds similar to 401(k)s in the U.S., which permit individuals to contribute tax-deferred money towards retirement with the government matching contributions up to a certain point.

We are invested with Turkey's largest pension fund provider, which currently comprises about 20% of the market: AvivaSA.2 AvivaSA is a joint venture between Sabanci Group, a large Turkish conglomerate, and Aviva, a large U.K.-based insurance company. Since the implementation of this private pension system, we've seen the number of participants increase. Additionally, assets under management have been increasing at roughly 35% per annum over the last five years. There is approximately $17 billion in assets under management in the pension fund industry, so we think there is plenty of scope for this to grow further over the next several years. AvivaSA may allow us to capture this growth and to benefit from potential additional changes the government may implement, such as auto-enrollment requiring people to opt-out of the system rather than opt-in, or requiring that companies offer their employees pension funds. AvivaSA has a large and robust distribution network and is well-positioned, in our opinion, to help capture growth in the space. We're very excited about this opportunity.

BUTCHER: Thank you very much.

Post Disclosure  

1 Unifin represented 0.90% of Van Eck Emerging Markets Fund net assets, as of 3/31/16. See holdings for more details.
2 AvivaSA represented 0.48% of Van Eck Emerging Markets Fund net assets, as of 3/31/16.  See holdings for more details.

 

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A Strong March for Moats http://www.vaneck.com/blogs/moat-investing/a-strong-march-for-moats-april-2016/ Strong performance continued in March for global moat-rated companies. Both the U.S.-focused Morningstar® Wide Moat Focus IndexSM and the internationally focused Morningstar® Global ex-US Moat Focus IndexSM maintained their strong relative performance versus their respective broad markets.

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Van Eck Blogs 4/5/2016 12:00:00 AM

For the Month Ending March 31, 2016

Performance Overview

March was another strong month for global moat-rated companies. Although the U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) slightly underperformed the S&P 500® Index (6.44% vs. 6.78%) for the month, it maintained its strong outperformance for the first three months of the year (6.51% vs. 1.35%). For international moats, Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) bested the MSCI All Country World Index ex USA for the month (8.89% vs. 8.13%), adding to its strong relative performance year-to-date (2.62% vs. -0.38%).

U.S. Domestic Moats: Bounce Back in Discretionary

Consumer staples firms were strong contributors to MWMFTR's returns for the month. Firms such as Harley-Davidson (HOG US), Polaris Industries (PII US), and Time Warner Inc. (TWX US) recovered from challenges earlier in the year to post strong gains. By contrast, several U.S. moat-rated banks struggled in March relative to other financials companies in the Index. Express Scripts (ESRX US) also faltered in March amid continued negotiation turmoil with health insurance company Anthem.

International Moats: Stock Picking is Key

MGEUMFUN's exposure to financials companies and its selection of companies within the sector contributed significantly to positive performance for the month. Financial firms from Australia, Hong Kong, and Canada performed well in March. One exception was the Swiss firm UBS Group (UBSG VX), which struggled after being added to MGEUMFUN in late March. Overall, Index companies from Australia, Hong Kong, and Canada drove performance, while Belgian, Israeli, and Swiss firms detracted most from returns.

Record Rebalance

Strong performance paired with several lowered fair value estimates by Morningstar analysts contributed to the highest turnover rate in the history of the MWMFTR Index. Sixteen of the Index's 20 companies were replaced as a result of its March review. Two firms, International Business Machines (IBM US) and Qualcomm Inc. (QCOM US), were removed from the Index as a result of an economic moat rating downgrade.

MGEUMFUN once again experienced significant turnover in March due to valuation changes and share price momentum. Twenty-four of the Index's 50 constituents were replaced as a result of its March review. See below for a full list of the review results for both indices.



 

(%) Month Ending 3/31/16

Domestic Equity Markets

 

International Equity Markets

 

(%) Month Ending 3/31/16

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Top 5 Index Performers
Constituent Ticker Total Return
Harley-Davidson, Inc.
HOG US
14.89
Polaris Industries Inc.
PII US
13.43
International Business Machines Corporation
IBM US
12.26
Emerson Electric Co.
EMR US
11.90
Time Warner Inc.
TWX US 9.31

Bottom 5 Index Performers
Constituent Ticker Total Return
Norfolk Southern Corporation
NSC US
-0.92
Express Scripts Holding Company
ESRX US
-1.12
U.S. Bancorp
USB US
-1.15
Monsanto Company
MON US
-2.50
Bank of New York Mellon Corporation
BK US
-3.46

View MOAT's current constituents

 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Top 5 Index Performers
Constituent Ticker Total Return
National Australia Bank Limited NAB AU 25.04
Ambuja Cements Limited ACEM IN 21.42
Kingfisher Plc KGF LN 16.22
Oversea-Chinese Banking Corporation Limited OCBC SP 14.42
Banco Santander-Chile BSAN CI 14.23

Bottom 5 Index Performers
Constituent Ticker Total Return
Teva Pharmaceutical Industries Limited TEVA IT -2.52
Lloyds Banking Group plc LLOY LN -3.10
Cameco Corporation CCO CN -3.27
UBS Group AG UBSG VX -3.32
Elekta AB Class B EKTAB SS -15.39

View MOTI's current constituents

 
 
 

As of 3/18/16

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Index Additions  
Added Constituent Ticker
Jones Lang Lasalle Inc JLL US
Allergan plc AGN US
State Street Corp STT US
Visa Inc A V US
Gilead Sciences Inc GILD US
CBRE Group Inc. CBG US
Express Scripts Holding Co. ESRX US
Amgen Inc AMGN US
Mastercard Inc A MA US
Walt Disney Co DIS US
McKesson Corp MCK US
The Bank of New York Mellon Corp BK US
LinkedIn Corp LNKD US
US Bancorp USB US
St Jude Medical Inc STJ US
Norfolk Southern Corp NSC US

Index Deletions  
Deleted Constituent Ticker
Polaris Industries, Inc PII US
Twenty-First Century Fox Inc A FOXA US
Harley-Davidson, Inc HOG US
Vf Corp VFC US
Time Warner, Inc TWX US
Berkshire Hathaway Inc B BRK/B US
Western Union Co WU US
American Express Company AXP US
Kansas City Southern, Inc KSU US
Union Pacific Corp UNP US
Emerson Electric Company EMR US
United Technologies Corp UTX US
Spectra Energy Corp SE US
Wal-Mart Stores, Inc WMT US
Intl Business Machines Corp IBM US
Qualcomm, Inc QCOM US

View Latest MOAT Reconstitution Report
View MOAT's list of current constituents
 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Index Additions  
Added Constituent Country
Cameco Corp Canada
National Bank of Canada Canada
Swatch Group AG Switzerland
Genting Singapore Plc Singapore
KBC Group NV Belgium
Embraer S.A. Brazil
BNP Paribas France
UBS Group AG Switzerland
Centrica United Kingdom
Novartis AG Switzerland
Richemont, Cie Financiere Switzerland
CapitaLand Commercial Trust Singapore
Roche Hldgs AG Ptg Genus Switzerland
Swire Properties Ltd Hong Kong
Bank of Nova Scotia Halifax Canada
Julius Baer Group Switzerland
Ioof Hldgs Ltd Australia
Grifols SA Spain
Contact Energy Ltd New Zealand
Mobile TeleSystems PJSC Russian Federation
China State Construction International Holdings Ltd. China
Henderson Group Plc United Kingdom
Teva Pharmaceutical Industries Israel
Sands China Ltd. Hong Kong

Index Deletions  
Deleted Constituent Country
National Australia Bank Ltd Australia
Goodman Group Australia
Spotless Group Holdings Ltd Australia
Qube Holdings Ltd Australia
Banco Santander Chile Chile
Empresa Nacional De Electricidad Sa Chile
Agricultural Bank Of China Ltd China
Bank Of China Ltd China
Industrial And Commercial Bank Of China Ltd China
Beijing Enterprises Holdings Ltd. China
Banco Bilbao Vizcaya Argentaria Sa Spain
Svenska Handelsbanken Sweden
Nordea Ab Sweden
Power Financial Corp Canada
Power Corp Of Canada Canada
Enbridge Inc Canada
Capitaland Mall Trust Reit Singapore
Wharf (Holdings) Ltd. Hong Kong
Ambuja Cements Ltd India
Itc Ltd India
Sun Pharma Industries Ltd India
Linde Ag Germany
Numericable Group France
Kering France

View Latest MOTI Reconstitution Report
View MOTI's list of current constituents

 
 


 
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Commodities Show Signs of Recovery http://www.vaneck.com/blogs/market-insights/commodities-show-signs-of-recovery-march-2016/ "We have seen commodities prices stabilize and some very encouraging signs.... We believe this is the kind of action that could set the stage for a long-term positive cycle."

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Van Eck Blogs 3/30/2016 12:00:00 AM

Wednesday, March 30, 2016

Watch Video Commodities Show Signs of Recovery  

Morris: "We have seen commodities prices stabilize and some very encouraging signs.... We believe this is the kind of action that could set the stage for a longer term positive cycle."

  Watch Now  

 

Morris follows up on his November 2015 video on commodities, with this fresh look at the commodities landscape.  

Prices Stabilize in First Quarter

TOM BUTCHER: The last three to four years have been challenging for commodities but it appears that prices have stabilized. Is that right?

ROLAND MORRIS: It is certainly starting to look like that. In the first quarter of 2016, we have seen prices stabilize and some very encouraging signs. We have also seen some recovery in commodity currencies. Gold bottomed in December 2015 and it is now up about 20% off that low [period from 12/17/15 to 3/22/16]. We had copper bottom in January and it is now about 17% off its low [period from 01/15/16 to 3/22/16]. Crude oil bottomed in February and it is up about 16% for the year [YTD as of 3/22/16]. We have seen what appears to be a base-building over the past two quarters. This is very encouraging. We believe it is the kind of action that could set the stage for a longer term positive cycle. Last year in 2015 we experienced what was a false start, but this year it feels more like this could be the real thing.  

Confidence Improves as China Fears Lessen

BUTCHER: Going into 2016 there was major concern about the outlook for China. Has that been ongoing?

MORRIS: I think that is one of the factors that contributed to what appears to be improving price trends in commodities. When you look back to the beginning of this year to January, we experienced a major decline in China’s stock market and its currency. This caused tremendous fear among investors that the worst case scenario was about to play out in China and that would have been a hard landing and possibly a forced currency devaluation because of capital flight. Since then things have calmed down a great deal. In February, capital outflows from China slowed markedly. I believe this is one of the key reasons we are seeing some restored confidence in commodities right now.

Fed's Softening on Rates Helps Commodities

BUTCHER: Are there any other factors that have helped improve the outlook for commodities?

MORRIS: I believe another important factor in commodities’ recent strength has been the shift by the U.S. Federal Reserve (Fed). The Fed indicated at its March meeting that it viewed current global financial developments as negative and it felt it needed to defer its proposed tightening program. That set the stage for some weakness in the U.S. dollar. The strengthening dollar trend had been one of the major headwinds facing commodities over the past three years. I think investors are starting to believe that the Fed will not be aggressive in raising rates and this has put a cap on the U.S. dollar’s appreciation, which has been very helpful for commodities.

BUTCHER: Can you provide me additional details about stabilization across the commodity spectrum?

MORRIS: We started making the following argument late last summer. We have felt that because of the reduction in capex (capital expenditure) across a number of commodities sectors and curtailment of investment, particularly in energy and industrial metals, investors have underappreciated the supply response. This is what we consider the fundamental story. Combined with improvements in some of these macro factors, this is what supports our point of view that this is the beginning of a new, positive cycle for commodities. It is against this backdrop, i.e., the reduction in supply, that we consider when looking out over the next two to five years.

Why this Period is Different from a Year Ago

BUTCHER: Do you think this is one of the distinguishing features between now and the situation back at the beginning of 2015?

MORRIS: Last year we certainly had some encouraging signs at the beginning of the second quarter, including appreciating price trends when crude oil went from $40 per barrel to $60 per barrel. Unfortunately that just petered out as the year progressed. I think the difference this time is the duration. We like to talk about fixing low prices, which requires a period of time to take hold. I think what is different now is we are a whole year further into the cycle and those capex cancellations from reduced investment may bring down supply significantly. From my perspective, the reason this may not be a false start is that we’ve had a longer period of low prices and it is both low prices and their duration that I believe help form a base.

BUTCHER: Have you had any interesting questions crop up in recent meetings with investment clients?

Interest in Commodities is on the Upswing

MORRIS: Yes. Just recently a client asked me what I think about our investments at VanEck in natural resources, including gold, etc. The client inquired how those investments might work in the event of a major negative geopolitical event. I had not been asked that question before. When you think about it, gold investments have the potential to provide protection in an unsafe environment. Additionally, natural resources by themselves can be considered a safety in a volatile investment climate because they are hard assets. The client’s question was interesting and I do think natural resources and gold in particular can do well in a tough environment.

BUTCHER: Have you been seeing any change in investor sentiment?

MORRIS: Overall I think clients have been more receptive. We have spent considerable time over the past few months meeting with institutional clients as well as other types of investors. My sense is that investors are starting to believe that now might be the time to consider either increasing natural resource investments or looking at them for the first time. I think this is partially because price trends have obviously improved in the first quarter. I also think most investors believe the Fed is unlikely to become aggressive with monetary tightening. We feel the Fed is more worried about the global growth environment and consequently it will probably keep the U.S. dollar contained. I think investors are starting to recognize that without the headwind of an appreciating U.S. dollar, natural resources may appear more attractive.

 
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Munis: Tune into My Webcast http://www.vaneck.com/blogs/muni-nation/tune-into-my-webcast-march-2016/ In a time of market uncertainty and volatility in many asset classes, municipal bond ETFs may provide investors with sensible solutions for their portfolios.

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Van Eck Blogs 3/22/2016 12:00:00 AM In a time of market uncertainty and volatility in many asset classes, municipal bond ETFs may provide investors with sensible solutions for their portfolios. My colleague, Tom Doe, President of Municipal Market Analytics, and I will engage in a practical discussion that addresses: Where Muni Bond ETFs May Fit in Today's Portfolios. The webcast is scheduled for Tuesday, March 29 at 4 PM ET.

Learn more and register here» 1 CFP Board CE credit available.

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Are Things Looking Up For Macau? http://www.vaneck.com/blogs/etfs/are-things-looking-up-for-macau-march-2016/ Macau is the world's largest gambling jurisdiction, seven times the size of Las Vegas.  For bullish gaming investors, Market Vectors® Gaming ETF (BJK) has a notable weighting in Macau-based casino and gaming companies.

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Van Eck Blogs 3/22/2016 12:00:00 AM

Authored by Michael Cohick, Product Manager, ETFs

For investors bullish on the future fortunes of the gaming industry, as of March 18, 2016, Market Vectors® Gaming ETF (BJK) had a 21.29% weighting in Macau-based companies focused on the casino, gaming, leisure and entertainment segments (based on country of domicile).  

At the end of 2015, there were 36 casinos in Macau: 23 situated on the Macau peninsula and the other 13 on Taipa Island. For an excess of places in which to lose your money, Macau is unparalleled. The trouble was that by the end of the year, monthly revenues from "Games of Fortune" had, year-over-year (Y-o-Y), been on the decline since end-May 2014. That's some 19 consecutive months of decline.

The steady stream of gamblers, especially rich ones, from mainland China may not have exactly dried up, but the Macau Patacas were no longer dropping so readily into the casino owners' pockets. It appeared that, at least vis-à-vis gambling, China’s Premier Li Keqiang attempts at “cleaning house” and fighting corruption were having some effect. Hope of some respite from constantly falling revenues seemed distant.

January's gambling revenues figures came in. Down again: 21.4% on January 2015. However, tourist arrivals from the mainland did increase during the month. And, by the end of February, tourist arrivals were up for the first two months of the year. But were they rich gamblers?

February Gambling Revenues Show Promise?

Then came February's gambling figures. OK, down again, but rather than the 2%-10% expected by analysts, the decline was only 0.1%. While this may make it the 21st consecutive monthly decline, it was, by far, the smallest of all the previous 20!

Is this the start of a recovery? At this stage it is, of course, impossible really to tell. But with VIP gamblers now fewer and farther between, the casinos are becoming increasingly dependent upon "mass market" players of "Games of Fortune". Any signs that arrivals to Macau are on the up-and-up will only bring hope to the casino owners.

Macau – Monthly Gross Revenues from Games of Fortune (MOP Million)  

 

Sources: Gaming Inspection and Coordination Bureau, Macau; MOP=Macau Pataca. As of February 29, 2016.  


 
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Generic Drugs: Life in the Fast Lane http://www.vaneck.com/blogs/etfs/generic-drugs-life-in-the-fast-lane-march-2016/ The FDA's focus has been on the approval process of Abbreviated New Drug Applications (ANDA), which may allow generic drug companies to benefit from expedited drug approvals.

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Van Eck Blogs 3/18/2016 12:00:00 AM

Authored by James Duffy, Product Manager, ETFs

With the 2016 U.S. presidential election in full swing, the candidates will surely continue to debate how best to rein in healthcare costs. Recent headlines, like those covering the huge price increases proposed by Turing Pharmaceuticals, have only ratcheted up the temperature in an already heated campaign season.

But what may be getting lost amid the election noise is the actions regulators, particularly the Food and Drug Administration (FDA), are already taking to help create cost savings through competition. The FDA's focus has been on the approval process of Abbreviated New Drug Applications (ANDA), which may allow generic drug companies to benefit from expedited drug approvals.

On Friday (3/11/16) the FDA's Office of Generic Drugs (OGD) announced a prioritization of the review of ANDA submissions. At the top of the list of priorities are potential first generic products, whose reference listed drugs do not have any blocking patents or exclusivities.1 Many view this as the FDA's response to Turing Pharmaceuticals, which proposed raising the current price of its drug Daraprim from $13.50 per pill to $750 per pill. Other companies may consequently think twice before pursuing price hikes of their own.

First Generics Seen as Public Health Priority

The FDA's action also comes less than two months after Dr. Janet Woodcock, Director at the FDA's Center for Drug Evaluation and Research, gave testimony to the Senate Committee on Health, Education, Labor and Pensions on the implementation of the Generic Drug User Fee Amendments of 2012. During her testimony, Dr. Woodcock cited the importance of "first generics," stating that "We consider 'first generics' to be public health priorities as they can lead to increased patient access." The announcement by the FDA officially transformed into an agency policy, the process of expediting first generic applications, which Dr. Woodcock compared to "an express lane at the supermarket."

Dr. Woodcock also cited some of the significant first generic approvals of 2015, including some drugs that are manufactured by companies held by Market Vectors® Generic Drugs ETF (GNRX).

 

Brand Name Generic Name Indication Generic Company % of GNRX
As of 3/16/16
Abilify Aripiprazole Bipolar Disorder Teva 8.15%
Zyvox Linezolid Pneumonia Mylan 4.88%
Integrilin Eptifibatide Heart Attack Aurobindo 1.33%

 

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Munis: An Easy Way to Compare Muni Funds http://www.vaneck.com/blogs/muni-nation/an-easy-way-to-compare-muni-funds-march-2016/ Introducing the Municipal Fund Monitor.

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Van Eck Blogs 3/15/2016 12:00:00 AM spacer

Munis: Debt Monitor Icon I am pleased to introduce the Municipal Fund Monitor. We hope this monthly report will help investors compare select muni ETFs and muni mutual funds in various categories according to key data, including assets, expense ratios and fees, yields, and performance.

Monthly Municipal Fund Monitor »

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Gold's Breakout Continues in February http://www.vaneck.com/blogs/gold-and-precious-metals/golds-breakout-continues-in-february-march-2016/ We are willing to declare the gold bear market over. Is this the beginning of a new bull? Time will tell.

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Van Eck Blogs 3/14/2016 9:30:10 AM

For the month ended February 29, 2016

Gold's Bear Market is Over

We are willing to declare the gold bear market over. Is this the beginning of a new bull? Time will tell.

Since the Federal Reserve (the "Fed") raised the targeted federal funds rate on December 16, a number of changes have occurred in the markets that lead us to believe that one of the longest and deepest bear markets in the history of gold and gold equities may be over.

These changes include:

  • Waning conviction in the market regarding further Fed rate increases.
  • The U.S. dollar's rise appears to have stalled.
  • Volatility and weakness in U.S. stock markets.
  • Strong gold prices despite seasonal weakness in Chinese demand.
  • Strong gold prices as oil and commodities have sunk to new lows.
  • Tremendous inflows to gold bullion exchange traded products (ETPs) and gold futures.
  • Technical breakout from an established downtrend.

Gold advanced $120.57 (10.8%) to $1,238.74 per ounce in February and is up $177.32 (16.7%) for the year [as of 2/29/16].

Growing Concerns About Global Financial Risks

Economic headwinds have escalated, from local occurrences in Asia and Europe to global concerns that now include the United States. The Institute for Supply Management's ("ISM") Non-Manufacturing Index fell more than expected in January and was weak in February as well. The U.S. has been in a manufacturing recession and the ISM reports suggest that the services sector, which makes up the bulk of the economy, is beginning to weaken.

Negative Interest Rates May Increase Gold's Appeal

Worries about systemic financial risk have also escalated due to many European countries and the Bank of Japan employing negative interest rates on certain reserves. There are now trillions of dollars' worth of sovereign bonds that trade at negative yields. Fed Chair Janet Yellen said recently that the Fed is evaluating whether negative rates are an option for monetary policy in the U.S. Meanwhile the president of the European Central Bank ("ECB") has said the ECB is looking at expanding its stimulus. The Governor of the Bank of Japan ("BOJ") stated last summer, "If we judge that existing measures in the tool kit are not enough to achieve the goal, what we have to do is to devise new tools, rather than give up the goal." If negative rates work their way into commercial deposits, it might undermine money market funds, pension funds, and the insurance and banking industries.

Negative rates may also increase gold's appeal, as gold effectively has a better yield at 0% than negative rate accounts. The Wall Street Journal reports that in the month after the BOJ's negative rate announcement, sales of personal safes rose as much as 250% in some stores. What we believe markets are telling central bankers in 2016 is that radical monetary policies have not produced positive results and that further financial engineering risks bringing down the financial system. So far this year, because of these concerns, gold has supplanted the U.S. dollar as the preferred safe haven investment.

South Africa Stands Out Among Gold Shares

Gold stocks are showing the leverage we expect in a positive gold market. The NYSE Gold Miners Index (GDMNTR) gained 36.1% in February while the Market Vectors Junior Gold Miners Index (MVGDXJTR) advanced 35.0%. While nearly all gold stocks have seen handsome returns this year, the South Africans have seen additional gains as a currency play, with some more than doubling this year in the wake of the collapse of the rand. We continue to see the geopolitical, operating, and other risks in South Africa as impediments to prudent investing. In addition, many of the highly levered (high cost and/or high debt) but lower quality companies have outperformed. It is not uncommon for short covering and momentum investing to propel low quality stocks in the early phase of a strong market.

What to Expect from Gold Miners in 2016

The junior gold stocks have lagged the larger producers, as evidenced by the 6.6% year-to-date underperformance of the MVGDXJTR relative to the GDMNTR. The performances of some of the mid-tier stocks have lagged as well. This lag is typical in the early phase of a newly rising market as investment flows start with the large companies. We expect the mid-tiers and smaller companies to outperform if gold continues higher.

By analyzing companies' fourth quarter reporting, 2016 guidance, and our meetings at the Bank of Montreal (BMO) Global Metals and Mining Conference, we have a better idea of what to expect in 2016 from gold mining companies. We have commented frequently about efforts to help reduce costs across the industry. It looks like the cost cycle is nearing its low point, as some companies are expecting further declines in 2016 and others are guiding to slightly increase. It is now common for companies to carry all-in mining costs of less than $1,000 per ounce. Large companies that were the perennial leaders 20 years ago are reasserting their roles. Newmont, Barrick, AngloGold, and Newcrest are the super majors that fell out of favor as they became bloated bureaucratic behemoths in the bull market. After several years under new managements, they are in the process of downsizing to become leaner, more efficient and more profitable companies. Barrick is targeting all-in mining costs below $700 per ounce by 2020. At the same time, company reports indicate that Barrick expects production to decline from 6.1 million ounces (before asset sales) in 2015 to 4.5 million ounces in 2020. Barrick also intends to reduce its net debt to zero. We think these are lofty goals, but if successful, they would solidify Barrick's leadership and potentially reset the bar for the industry.

Gold Strategy Review: A Focus on Value Creation

Historically our investment strategy has tended to underperform during downturns in the gold price and outperform in positive gold markets, generating strong performance over the long term. However, based on our years of experience following the gold industry, we find our performance, and that of most actively managed funds in general, to be surprising so far this year given the rising gold price environment.

The overriding theme of our investment criteria, which has not changed, is value creation. Companies create value by taking an essentially worthless piece of property and turning it into a gold mine. This is what motivated me as a geologist in the '80s and '90s and it drives me now as a fund manager. So why is this investment style performing differently in 2016?

To answer that question we have undertaken a portfolio review and here are our conclusions:

  • As we mentioned earlier, South African mining stocks are on fire despite the risk mentioned earlier, with some gaining more than 100% this year. In the past, we have avoided South African stocks due to geopolitical risk, union strife, difficult deep mining conditions, and an unreliable power grid.
  • Highly indebted supermajors have outperformed. The market no longer seems concerned with excessive debt. We have been avoiding these stocks.
  • Beaten down companies with high costs and/or no growth have outperformed. We have avoided these fundamentally flawed names.
  • Mid-tiers and juniors that are creating value through growth have underperformed due to market concerns over project financing or acquisitions. These concerns began early in 2015 and gained momentum at the beginning of 2016. Some of these companies may need additional capital if gold prices average around $1,100 or less. We have been overweight in these stocks.
  • We believe most of the companies that fall into the first three categories are unable to create value outside of their ongoing operations. However, until we see the market again rewarding companies that fit our investment style, we must adapt. We are not abandoning our quest for companies that create value, just toning it down. Here are the key portfolio developments that have been made as of the end of February.

Investment considerations:

  • We continue to avoid South Africa due to risks. The outperformance is largely a function of a collapse in the rand, which we now believe is priced into the stocks.
  • We have said that the supermajors have done a good job of paring down debt. We initiated a position in Newmont last year and we continue to view the large caps in a more positive light. With the operating improvements and financial discipline evident throughout the bear market, these large caps are again able to attract the big funds.
  • We will consider more operationally levered companies if the relative valuation is compelling. However, some of these companies are in need of an acquisition to maintain production. We will continue to underweight or avoid potential acquirers until they make a transformative acquisition.
  • We have adjusted our exposure to mid-tier growth names until we see the market take a more positive view. We are not avoiding these companies, as we believe they are now acquisition targets for the majors. We have increased exposure to Australian mid-tiers and juniors. There is a reemerging gold sector in Australia that doesn't carry the same financing stigma of its global peers.

Our overall top-down allocations have not changed much. However, the strategy has more names, fewer overweights, and a few new names in the top 10. As we had indicated at yearend, we have reduced royalty companies to rotate into producing companies. The portfolio will remain more diversified until we gain the conviction to make larger bets. Also, our investment universe will expand if gold stays above the $1,200 per ounce threshold.

Finally, despite these challenges, we find all this market action very compelling. Seeing the movement in South African and other stocks reminds me of the early phase of the bull market that started in 2001.

Fed's Rate Hike: The Straw Breaking the Camel's Back?

To appreciate what is going on in the markets this year, we believe investors must use a perspective that takes into account the post-credit crisis economy. We believe that the post-crisis monetary tightening cycle did not begin with the first rate increase, as it did in past cycles. Tightening began when the Fed began "tapering" its purchase of government bonds in late 2013. Once the Fed stopped buying bonds, it talked about raising rates. Then on December 16, 2015 it finally increased rates by 25 basis points. We see this as the modern tightening cycle and it has been going on for two years. The Atlanta Fed's Wu-Xia Shadow Federal Funds Rate model measures an overall tightening in financial conditions that occurred while rates were artificially held around the zero-bound by central banks. The Wu-Xia calculation estimates there has been a tightening that is equivalent to a 3.19% rate rise over the last two years. An economy that, in our opinion, is overburdened with regulations, taxes, uncertainties, and misallocations of capital is unable to grow without monetary stimulus. The December 16 rate increase was the straw that is seemingly breaking the camel's back.

Three areas that we believe have underpinned the stock market have diminished as this tightening cycle has progressed:

  • Companies that took on debt when corporate rates were lower to buy back stock.
  • Risk averse investors who moved out of treasuries and CDs into higher risk stocks and junk bonds to generate yield.
  • The sovereign wealth funds of energy producing countries who must sell stock to help support their economies.

Flows in to Gold Stock Reverse Course

As markets seem to have passed a potentially historic inflection point, it looks like the money that flowed out of gold and into stocks and corporate debt over the last five years is beginning to reverse course. When a little of this money flows into gold stocks, it can have a big impact. The market cap of the global gold industry is only $205 billion, which is roughly one third (36%) of the value of Apple. While gold stocks have performed well this year, when factoring in the higher gold price, Scotiabank figures stock valuations of the senior producers are lower now than they were a month ago. We find that the valuations of many mid-tier and junior stocks are even more compelling.

Gold Breaks Out of Technical Downtrend

Gold has broken a technical downtrend that was well established. Following gold's crash in 2013, it traded in a declining $150 range that in December stood at $1,050 to $1,200 (see chart below). Gold has clearly broken out of this range and until we see a new technical pattern emerge, it will be difficult to discern a trend. The next major technical resistance is at $1,600, which was the support level before the crash in 2013. However, we believe reaching this level is unrealistic in 2016, barring some sort of black swan event. At some point during the first half of 2016, we expect gold to pull back and consolidate. At that point, the depth and duration of the correction will help determine whether this is a new positive trend. We believe gold will be driven by a heightened undercurrent of financial risk as a result of growing distrust of central bank policies, global economic malaise, and overall market turbulence. Layered onto this is additional uncertainty brought on by Middle Eastern turmoil and widespread discontent with political leadership as evidenced by the U.S. presidential race and the British referendum on EU membership.

Breaking the Technical Downtrend - Gold Price Per Ounce (USD)

Breaking the Technical Downtrend - Gold Price Per Ounce (USD)

Source: Bloomberg.

Download Commentary PDF with Fund specific information and performance»

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Moat Investing: A Month For Moats http://www.vaneck.com/blogs/moat-investing/a-month-for-moats-march-2016/ February was a strong month for global moat-rated companies, particularly in the U.S.

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Van Eck Blogs 3/10/2016 12:00:00 AM

For the Month Ending February 29, 2016

Performance Overview

February was a strong month for global moat-rated companies, particularly in the U.S. The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) far outperformed the S&P 500® Index (5.22% vs. -0.13%). For international moats, Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) posted positive returns while the MSCI All Country World Index ex USA was negative for the month (0.88% vs. -1.14%).

U.S. Domestic Moats: Success in Tech and Industrials

The strong performance of several industrial companies, including rail operators Kansas City Southern (KSU US) and Union Pacific Corporation (UNP US), drove performance in February. Although the overall U.S. information technology sector struggled, all three information technology firms in MWMFTR posted positive performance in February: Qualcomm (QUAL US), International Business Machines (IBM US), and Western Union (WU US). The leading company for the month was Polaris Industries (PII US), as it rebounded from poor results released at the end of January.

Several U.S. moat-rated firms, including media titan Time Warner Inc. (TWX US) and biotech firm Biogen, Inc. (BIIB US), struggled alongside the broad market.

International Moats: Financials Bounce Back

Financials reversed their January trend by leading the way for MGEUMFUN in February. Industrials also posted strong returns. Swedish firms provided the strongest boost to MGEUMFUN's performance, particularly Elekta AB (EKTAB SS), which develops and sells clinical solutions for the treatment of cancer and neurological disorders.

Several bank stocks out of Australia, Hong Kong, and the UK struggled in February, as did the few consumer staples stocks represented in MGEUMFUN.



 

(%) Month Ending 2/29/16

Domestic Equity Markets

 

International Equity Markets

 

(%) Month Ending 2/29/16

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Top 5 Index Performers
Constituent Ticker Total Return
Polaris Industries Inc.
 
PII US
 
19.77
Kansas City Southern
 
KSU US
 
15.28
QUALCOMM Incorporated
 
QCOM US
 
13.08
United Technologies Corporation
 
UTX US
 
10.98
Union Pacific Corporation
 
UNP US 10.29

Bottom 5 Index Performers
Constituent Ticker Total Return
Twenty-First Century Fox, Inc. Class A
 
FOXA US
 
0.19
Wal-Mart Stores, Inc.
 
WMT US
 
-0.03
Monsanto Company
 
MON US
 
-0.67
Biogen Inc.
 
BIIB US
 
-5.00
Time Warner Inc.
 
TWX US
 
-5.45

View MOAT’s current constituents

 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Top 5 Index Performers
Constituent Ticker Total Return
Elekta AB Class B   EKTAB SS 18.94  
Spotless Group Holdings Ltd SPO AU   17.56  
Schneider Electric SE SU FP   11.99  
CapitaLand Mall Trust CT SP   11.36  
Goodman Group GMG AU   7.78  

Bottom 5 Index Performers
Constituent Ticker Total Return
Agricultural Bank of China Limited Class H 1288 HK -6.83
Numericable-SFR SA NUM FP -7.46
ITC Limited ITC IN -8.16
HSBC Holdings plc HSBA LN -8.27
National Australia Bank Limited NAB AU -8.55

View MOTI’s current constituents

 
 
 

As of 12/18/15

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Index Additions  
Added Constituent Ticker
Spectra Energy Corp SE US
Biogen Inc BIIB US
VF Corp VFC US
Harley-Davidson Inc HOG US
Kansas City Southern Inc KSU US
International Business Machines Corp IBM US
American Express Co AXP US
Wal-Mart Stores Inc WMT US
Varian Medical Systems Inc VAR US

Index Deletions  
Deleted Constituent Ticker
Applied Materials Inc AMAT US
Autodesk Inc ADSK US
Discovery Communications Inc DISCA US
Walt Disney Co DIS US
ITC Holdings Corp ITC US
Franklin Resources Inc BEN US
Merck & Co Inc MRK US
Procter & Gamble Co PG US
Norfolk Southern Corp NSC US

View Latest MOAT Reconstitution Report
View MOAT’s list of current constituents
 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Index Additions  
Added Constituent Country
Dongfeng Motor Group China
Ainsworth Game Technology Ltd Australia
Beijing Enterprises Hldgs Ltd China
Technip Sa France
Spotless Group Holdings Ltd Australia
Numericable Sfr Sa France
Enbridge Inc Com Canada
Sun Pharmaceutical Industries India
China Telecom Corp Ltd China
Kingfisher Plc United Kingdom
Elekta Ab Sweden
Ci Financial Corp Com Canada
Sanofi (Sanofi Aventis) France
China Merchants Bank Co China
National Australia Bank Ltd Australia
Qube Holdings (Qube Logist) Ltd Australia
China Mobile Ltd China
Symrise Ag Germany
Linde Ag Germany
Nordea Bank Ab Sweden

Index Deletions  
Deleted Constituent Country
Brambles Industries Ltd Australia
Ioof Hldgs Ltd Australia
Platinum Asset Management Limited Australia
Commonwealth Bank Australia Australia
Sigma Pharmaceuticals Limited Australia
China State Construction International Holdings Ltd. China
Grupo Televisa Sab Cpo Mexico
Burberry Group United Kingdom
Centrica United Kingdom
Johnson, Matthey United Kingdom
Edenred France
United Overseas Bank Singapore
Capitaland Commercial Trust Singapore
Icici Bank Ltd India
State Bank Of India India
Unilever Nv Netherlands
Lafargeholcim Ltd Switzerland
Potash Corp Of Saskatchewan Canada
Cameco Corp Canada
Millicom Intl Cellular S.A. Sweden

View Latest MOTI Reconstitution Report
View MOTI’s list of current constituents

 
 


 
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Munis: Investment Opportunities in the Current Environment http://www.vaneck.com/blogs/muni-nation/muni-investment-opportunities-current-environment-march-2016/ This week I share my latest video on why I think municipal bonds may offer investors various advantages at this point in time.

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Van Eck Blogs 3/8/2016 12:00:00 AM

This week I share my latest video on why I think municipal bonds may offer investors various advantages at this point in time. I also explain a couple of actionable strategies to help capture the potential opportunities available.

Watch Video Muni Investment Opportunities in the Current Environment

"...the municipal bond market, which, given its historically strong credit quality and low volatility, will hopefully continue to deliver strong after-tax returns to investors."

Watch Now | Video Transcript

VIDEO TRANSCRIPT: MUNI INVESTMENT OPPORTUNITIES IN THE CURRENT ENVIRONMENT

TOM BUTCHER: What are the advantages of investing in municipal bonds in the current environment?

JAMES COLBY: There's a great deal of uncertainty and volatility in the overall marketplace right now. Equities are up one day, down the next. Corporations have been impacted significantly by the drop in energy and current oil prices. Alongside all of this is the municipal bond market, which, given its historically strong credit quality and low volatility, will hopefully continue to deliver strong after-tax returns to investors.

The municipal marketplace is one that offers a variety of potential opportunities for investors, whether investors are looking to manage their interest rate risk or achieve higher returns in terms of yield. It may even be overlooked by investors who are departing from other traditional asset classes and looking for a place to put their money. I think the municipal marketplace serves as an asset class that will likely please investors once they have an opportunity to look at it and its potential benefits.

BUTCHER: Thank you. Do you see any specific opportunities today?

COLBY: I think there are two fairly distinct opportunities for investors to consider. One is based on interest rates and interest rate outlooks. The other is based on risk that investors might be willing to assume on a credit basis.

From an interest rate perspective, the history of the municipal yield curve, particularly the intermediate part of it, suggests that over time the steepness of the curve offers an opportunity to gain incremental returns as an investment moves from longer maturities to shorter maturities. We have a product with ticker symbol ITM (Market Vectors AMT-Free Intermediate Municipal Index ETF) that captures that steepness and investment opportunity without taking on a great deal of interest rate risk, which one would normally see and expect from the 30-year part of the yield curve.

The other opportunity is in high yield. Municipal high yield, because it is broadly diversified, doesn't have the distinct and deep exposure to energy that other asset classes may have, particularly in the corporate high yield marketplace. Municipal high yield's broader diversification still delivers high yield and the taxable equivalent is favorable relative to the corporate market and other asset classes.

Intermediate investment grade and municipal high yield are the two opportunities that I would suggest investors take a look at.

BUTCHER: Wonderful. Thank you very much.


jim_Colby_signature

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Munis: March Madness? http://www.vaneck.com/muni-nation-blog/march-madness-03-03-16/ Whether one is wary of the "Ides of March" or worried about the effect of college basketball’s "March Madness" on the psyche of investors, recent history shows that munis have mostly demonstrated negative returns in the month of March.

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Van Eck Blogs 3/3/2016 12:00:00 AM It is very tempting to look backward in an attempt to be forward looking, especially as we enter the month of the year that has historically been anything but robust for the muni market. Whether one is wary of the "Ides of March" or worried about the effect of college basketball’s "March Madness" on the psyche of investors, recent history shows that munis have mostly posted negative returns in the month.

Muni Mutual Fund Average Returns for the Month of March  

Muni-Mutual-Fund-Average-Return.jpgSource: Morningstar, as of 3/1/16.  

But let’s not jump to conclusions about what that might mean for investors. As strong as the historical data may be, there are important factors in play that might lead one to conclude that a "stay the course" approach to munis may be prudent.

The rationale I consider the most reasonable is as follows. For the past 24 months, year-over-year performance has been positive, supported by a lingering imbalance between supply and demand. Despite the continuance of low interest rates, there has not been the anticipated spike in issuance from municipalities or the anticipated series of rate hikes by the Federal Reserve ("Fed"). Thus reinvested cash and new dollars looking for a place to wait out current market volatility have seemingly been making their way to munis, creating positive returns so far this year.

Issuance for this month is forecast by Municipal Market Analytics to be stronger than what we have witnessed so far in 2016, and that is fundamental in the equation of supply outstripping demand, which may lead to higher yields, lower prices, and negative returns. Whenever there is a "whiff" of negative sentiment, traders generally like to move their bids lower in hopes of taking on inventory at more attractive prices. Those lower prices will lead to better entry points for investors who believe, as I maintain, that there is little inherent risk in this historically negative month.

Why? Because the Fed is not seeing a compelling U.S. economic recovery that otherwise would argue for a hike of the federal funds rate. The characteristics of the muni asset class — low volatility, strong credit quality, attractive taxable equivalent yields — will continue to form the cornerstone of an allocation policy that highly regards municipals. Even if other asset classes were to rally, the value of the tax exemption may continue to deliver returns that are difficult to find elsewhere.

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Big Biotech in the Bargain Bin http://www.vaneck.com/blogs/big-biotech-in-the-bargain-bin-february-2016/ The sell-off in biotech stocks that began last summer has resulted in valuations that are on par with and in some cases lower than those seen in the broad equity market. For investors with an appetite for biotech, this may provide a bargain-priced opportunity.

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Van Eck Blogs 2/26/2016 12:00:00 AM

Authored by Gabor Gurbacs, ETF Data Analyst

The sell-off in biotech stocks that began last summer has resulted in valuations that are on par with and in some cases lower than those seen in the broad equity market (at this writing, 2/17/16). Biotech valuations have not dipped this low since the aftermath of the 2007-2008 financial crisis. For investors with an appetite for biotech, this may provide a bargain-priced opportunity.

Since 2005 U.S. biotech stocks have traded at higher earnings multiples than the broader S&P 500® Index. Over the last 10 years biotech stocks have had an average price-earnings (P/E) ratio of 23.3 versus 16.2 for the S&P 500 Index. Today those metrics are nearly equivalent in the 16 P/E range. A number of large-cap biotech companies have traded below general market valuations, e.g., Amgen (AMGN), which traded at 16.2x earnings and Gilead Sciences (GILD) at 7.7x earnings, as of 2/17/16. By comparison, Market Vectors® Biotech ETF ( BBH) has a P/E ratio of 18.6 as of 2/17/16. BBH seeks to track the Market Vectors U.S. Listed Biotech 25 Index, which is comprised of the 25 largest and most liquid U.S.-listed biotech stocks.

P/Es of Biotech Stocks Fall Below P/E of Broader U.S. Equities
Historical Averages 12/31/2005 - 2/17/2016

02-26-2016 Biotech
Past performance is no guarantee of future results. Index performance is not illustrative of fund performance.  

While pricing concerns, weakness in emerging markets currencies, and the strength of the U.S. dollar may have contributed to weakness in biotech, there may be better news down the road. The expected total number of upcoming clinical trials, new drug applications, and new biologics up for approval is 32% higher now than five years ago.1 As the global population ages, demand for drugs is growing. Additionally, the current price environment may compel large biotech companies with healthy cash balances to grow their businesses through acquisitions or engage in share buyback programs; such activity could support share prices.

Amidst these trends, investors may consider targeting large biotech companies via an exchange-traded fund such as Market Vectors Biotech ETF (BBH) to potentially capture value in the biotech industry.

Sources: VanEck, FactSet and Bloomberg. Data as of 2/17/2016.  


 
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Special Gold Market Update 02/23/16 http://www.vaneck.com/blogs/gold-special-market-update-february-23-2016/ Gold bullion prices climbed from $1,061 an ounce on January 1, 2016, to $1,263 on February 11, a 19% increase in just six weeks. And although they have retreated to the $1,200 range since then, we remain optimistic.

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Van Eck Blogs 2/23/2016 12:00:00 AM

Is Gold's Slumber Over?

Intro: "Golden slumbers fill your eyes. Smiles awake you when you rise."  

Gold prices climbed from $1,061 an ounce on January 1, 2016 to $1,263 an ounce (an intraday high) on February 11, a 19% increase in just six weeks. As Paul McCartney sang on Abbey Road’s "Golden Slumbers," gold bullion and its devoted investors appeared to be waking from a nearly five-year bear market slumber with well-deserved grins. Since February 11 gold prices have retreated slightly, and have been trading within a range of $1,200 to $1,240 an ounce (at this writing).  

The question remains: Is Gold’s Slumber Over?   

We think so, although we expect price volatility to continue. Joe Foster explains why.  

Renewed Enthusiasm for Gold 

It’s pretty clear that financial markets in January helped to remind investors around the globe why perhaps virtually every portfolio should have an allocation to gold, both as a diversifier and a hedge against financial risk. Escalating geopolitical turmoil, currency issues, and slow growth are all potential risks that threaten economic development globally.

Importantly, markets are beginning to take action. Gold shares have been in one of their worst bear markets, but are the best performers this year thus far. As long-term gold investors, we have had a watchful eye out for the first glimmer of a turn in sentiment. Technical trends and fundamental drivers have shown significant improvement. It may be time to polish off the case for gold mining stocks as 2016 might be the year prices reverse course.

Despite our renewed enthusiasm for gold, we believe that bullion prices must not only break through $1,225 an ounce, but also remain above the $1,200 threshold in order to support a definitive breakout. It looks as if the markets will continue to embrace gold in the current environment and perhaps we can look back at the December $1,046 price as the bottom of the gold bear market. We might also look back on the December 16 Federal Reserve ("Fed") rate increase as the straw that broke the camel’s back, triggering unforeseen risks to the global financial system.

Negative Rates, Loss of Confidence Good for Gold

Most of us don’t need reminding that low and/or negative real interest rates are generally good for gold. That said, it will become increasingly important to watch the global trend toward low, and even negative, interest rates. Negative rates have become more common in the Eurozone and Japan, and there is currently around $600 trillion of government debt around the world with a negative yield. And, while it may seem far-fetched for the U.S., the Fed is telling banks to prepare for the possibility of negative rates. Undeniably, the U.S. economy continues to appear vulnerable and consequently, the market and now the Fed are increasingly adopting a cautious view for 2016.

Gold Bullion Prices versus Real Interest Rates: 1970 to 2015  

Gold-Lower-Interest-Rates  

Source: Bloomberg, data as of 02/02/16.  

Is this the beginning of a loss of confidence in central banks? The banks’ inability to generate normal economic growth or inflation is certainly cause for concern for many investors. As stated by John Mauldin in his popular blog, Thoughts from the Frontline, "Clearly, QE [quantitative easing] has not worked …. if out-of-control borrowing was the original problem, then QE as a solution is kind of like drinking more whiskey in order to sober up. And if you reduce the earnings of those who are savers so that they are no longer able to spend, the whole purpose of the original project—to foster economic growth—is defeated." Historically, gold and gold shares have acted as a safe haven during periods of low confidence in the world’s financial systems (a “safe haven” is an investment that is expected to retain its value or even increase its value in times of market turbulence).

Mining Shares Regain Their Mojo

Operating costs at mining companies rose drastically during the recent bull market, seriously impacting profitability. Since the start of this current market downturn, however, some positive changes have taken place in the gold mining industry. We believe that the industry is in the best shape it's been in for a long time.

The most elementary fundamental support for a positive outlook for gold stocks is the impact of deflation on the cost of labor, material, and services. Costs have been falling since 2012. Global producers have reported that total cash costs for the first nine months of 2015 fell by 7% year-on-year, from a total of $733 an ounce to $680 per ounce.1 Average all-in mining costs are now below $1,000 per ounce. Gold miners have historically benefited in deflationary periods from declining costs of labor and materials. In the 1930s, shares of Homestake Mines (the major gold equity of the time) rose significantly as the company was able to expand profits during this period due to its falling cost structure. Shares of Homestake Mines increased from $65 in 1929 to $544 in 1936.2  

These reductions in costs, improvements in efficiency, as well as deep declines in the currencies of commodity-producing countries, have all helped gold companies generate cash flow and maximize profit—restoring the viability of the sector.

Technicals and Leverage

Gold share valuations are at multi-decade lows and currently have technical support. The current bear market that began in late 2011 has eclipsed the duration of the average bear market since 1970 by five months, and prices are nearly 75% off their five-year highs.3 However, price levels have begun to turn and gold shares have outpaced gold thus far in 2016.

Many investors use gold stocks to gain leveraged exposure to gold in a rising gold price environment. It’s all about potential earnings leverage; as the gold price increases, the change in a company’s profitability can outpace the change in the gold price. We’ve just come off a one-month period during which the expected outperformance of gold stocks relative to gold did not materialize, but we do not expect this trend to continue. Gold shares should offer their highest leverage to gold when the price is close to the cost of production, as is now the case. So, unless costs increase at the same time as the price of gold (as in 2011 and 2012), it makes sense that equities should outperform gold during rising gold prices as has been the case over the last several years.

Gold Equities: Leveraged Exposure to Gold  

Gold-Equities-Leveraged-Exposure-to-Gold Source: Bloomberg data as of 2/9/16.  

For a deeper analysis, please take a look at our presentation, The Case for Gold in 2016

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Marketplace Lending: Block the Noise http://www.vaneck.com/blogs/van-eck-views-february-18-2016/ The online lending sector has been the target of a few unfavorable media reports as of late....We recommend that investors block the noise and stay vigilant for potential investment opportunities.

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Van Eck Blogs 2/18/2016 12:00:00 AM

Intro: The online lending sector has been the target of a few unfavorable media reports as of late. Our opinion is that some of the headline risks highlighted by the media are overblown and overhyped. We do agree, however, that investors should be vigilant in the current environment, especially regarding economic growth. The potential of a downturn in the U.S. economy offers considerably high risks that warrant caution in many asset classes. It also underscores the importance of identifying alternative sources of return and income. That said, we continue to hold a high level of interest in the marketplace lending sector. For additional thoughts, please read our previous post from January.

Volatile Markets Bring Hyped Headlines

There’s no question that this has been a difficult market for most asset classes. Not unexpectedly, media reports predicting Armageddon have become commonplace. Many of them have highlighted valid points to be analyzed but, in many cases, the wild predictions have not panned out and the risks have proven to be exaggerated.

Recently, questions have been raised about the models used by Lending Club (LC) to measure the risk on its online loans. Some have opined that the LC models are flawed and that the loans are underpriced. We do not agree with this view. LC has since issued a performance update which confirmed that credit performance for most fragments was as expected, as well as provided "the correct interpretation" of its modeling.

The issue of charge-offs is central to virtually all investors in online loans. Like risk, it fluctuates over time. It's not only natural, but necessary, for platforms to continuously adjust their pricing. Our concern is more macro in nature. After a period of positive economic news that led the U.S. Federal Reserve ("Fed") to raise rates, we may be at an inflection point.

How Could a Downturn of the Economy Affect Charge-Off Rates?

Bloomberg Consensus Forecast for U.S. Real GDP calls for 2.4% growth in 2016, but some banks have recently lowered expectations significantly. For example, Standard Chartered lowered its 2016 GDP forecast from 1.6% to 1%, UBS lowered its forecast from 2.8% to 1.5%, and Commerzbank lowered its forecast from 2.5% to 2%. The transmission mechanism is straightforward. Less growth leads to fewer jobs. As borrowers lose jobs, their ability to pay back loans gets compromised. The silver lining here is that the chances of further hikes by the Fed have decreased considerably (which typically helps valuations of fixed income portfolios). As shown in the chart below, charge-off rates increased slightly in October and November 2015. It will be interesting to see if this trend persists or if charge-off rates return to previous levels.

Chart 1: Monthly Coincidental Charge-Off Rates

PP - Monthly Coincidental Charge-off Rates
Source: Orchard.

Ezubao Casts a Shadow on China's Online Finance Industry

The arrest of 21 people involved with Chinese peer-to-peer lender Ezubao, which was accused of running a Ponzi scheme, also gained much of attention recently. Many have raised the question as to whether this could happen to a U.S. lending platform. While possible, the chances are considerably smaller in our opinion. Local regulation (on a country-by-country basis) is at very different stages. In China, initial regulatory proposals were issued by the People’s Bank of China only in July 2015 and subsequently by the China Banking Regulatory Commission in December 2015. Last year alone, about 700 online lenders went bust in China (there remain an estimated 2,000 online lenders in the country).

U.S. online lenders, in contrast, are at a different inflection point. They are currently required to comply with federal consumer financial protection laws and some are subject to securities regulation.1 Many of the largest players (including LC and Prosper) have registered with the U.S. Securities and Exchange Commission (SEC).2 In addition, a recent report by the U.S. Government Accountability Office has explored the potential for additional regulatory oversight by the Consumer Financial Protection Bureau (CFPB) or the Federal Deposit Insurance Corporation (FDIC). On the legal front, the U.S. Supreme Court was asked in November to accept for review the U.S. Court of Appeals for the Second Circuit's opinion in Madden versus Midland. In December, the Supreme Court requested Madden to file a response. A decision regarding whether the petition warrants review by the Court is expected by the end of March.

Positive Fundamentals for Online Lending Continue

Despite a few unsavory headlines and turbulence in financial markets, the fundamentals for online lending loans continue to be positive.

The Orchard US Consumer Marketplace Lending Index3 has shown steady growth with very low volatility since its inception in 2011. While the concern that the asset class has not gone through an economic downturn is valid, the low volatility and steady returns shown over the past five years is certainly worth noting (and watching).

Chart 2: ORCHLEND Index Shows Steady Growth Since 2011

PP - Orchard U.S. Consumer Marketplace Lending IndexSource: Orchard Indexes, as of 12/31/15.

U.S. unemployment continues to decline and is currently below 5%, with the latest JOLTS (Job Openings and Labor Turnover Survey) data showing that job openings have almost tripled since the financial crisis.

Chart 3: U.S. Job Openings and Employment

PP - Job Openings Employment
Source: Bureau of Labor Statistics.
Note: Shaded area represents recession as determined by the National Bureau of Economic Research (NBER).

U.S. Economic Data is Key Going Forward

As is true for any asset class, there are numerous risk factors that can affect investments in marketplace loans: regulation, platform fraud, cyber security, and rate hikes, to name a few. Thus far, fundamentals continue to be strong. Going forward, data indicating where the U.S. economy is heading will be paramount to credit rating and duration choices that optimize the risk/reward ratio in a loan portfolio. We recommend that investors block the noise and stay vigilant for potential investment opportunities.

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Munis: Once Upon a Time http://www.vaneck.com/muni-nation-blog/once-upon-a-time-02-16-16/ Once upon a time...there was a shining city at the foot of Lake Michigan.

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Van Eck Blogs 2/16/2016 12:00:00 AM Munis: Once Upon a Time...there was a shining city at the foot of Lake Michigan. Described as a “Gateway” for trade and transportation, connecting the upper Midwest and Canada with the Gulf of Mexico via the Mississippi, Chicago is notable for having “played a central role in American economic, social, cultural, and political history and since the 1850s has been the dominant Midwestern metropolis.” Further, “the city grew exponentially, becoming the nation's rail center and the dominant Midwestern center for manufacturing, commerce, finance, higher education, religion, broadcasting, sports, jazz, and high culture.”1

Known for its rough and tumble politics, the luster ascribed to Chicago has been tarnished of late as the city, the City Board of Education (BOE), and the state have found their once highly regarded credit ratings tumbling under the weight of indebtedness and political stalemate. Moody’s Investors Service has treated the issuers most harshly, sending the ratings of the city’s $9.3 billion general obligations and $6.8 billion Board of Education bonds well below the investment grade threshold of Baa.2 The “cost” has been significant, as reflected in the most recent issue for the BOE, where the interest cost for a recent $725 million issue was over 8.5%, compared to 6.32% for an older issue of BOE trading in the secondary market most recently at year-end.3

Yes, this is an election year and officials seem loath to enact measures, even to resolve such dire fiscal events as have occurred in this state and city. But the view from on high sees danger in the form of impaired services lurking on the doorsteps of the citizenry. When politicians fail to find a path towards resolution, especially in a community such as Chicago where there is imbedded wealth and tradition, the rest of the country is put on notice.

1Wikipedia as of 2/9/16.
2Mesirow Financial as of 2/5/16. Gradations of creditworthiness are indicated by rating symbols, with each symbol representing a group in which the credit characteristics are broadly the same. The symbols that are used by Moody’s to designate least credit risk to that denoting greatest credit risk: Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. Ratings from Ba to Caa are below investment grade (non-investment grade) or speculative grade.
3Bloomberg as of 2/9/16.
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Gold Shines as a Safe Haven in January http://www.vaneck.com/blogs/gold-commentary-january-2016/ It has been a very eventful start to the year. The price of gold bullion rose during the month as concerns of global financial risk intensified. 

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Van Eck Blogs 2/11/2016 12:00:00 AM

 

For the month ended January 31, 2016

It has been a very eventful start to the year. On January 4, the first trading day of 2016, the Chinese equity market fell drastically, with the Shanghai Composite Stock Index1 down 6.9% during the session. The equity slide continued, repeatedly triggering the recently instituted circuit breakers, which have subsequently been suspended. The Shanghai Composite Stock Index ended the month of January down 22.6%. The Chinese selloff spread to global equity markets with the S&P 500® Index2 having one of its worst starts to any year, falling almost 9% three weeks into January. By month end, however, the Index had recouped some losses to end January down 5%. The MSCI All-Country World Index,3 which includes both emerging and developed world equity markets, fell 8% during the month. Commodities also took a hit, with oil and copper down 9% and 3%, respectively. Even the Japanese yen ended the month weaker, down 0.8% relative to the U.S. dollar, after the Bank of Japan (BOJ) surprisingly announced on January 29 its adoption of negative interest rates, which drove the yen down 2% that day.

Disappointing U.S. Economic Data  

Except for a stronger than expected employment report, most major U.S. economic data released during the month was disappointing, including the Empire State Manufacturing Index4, retail sales ex-autos, industrial output growth, capacity utilization, durable goods orders, pending December home sales, and Q4 2015 real GDP growth. It was no surprise that the Federal Reserve (Fed) left rates unchanged on January 27, but revised messaging in the Fed’s statement raised many questions in the market. The Fed softened its assessment of its growth and inflation outlooks, and indicated that it is "closely monitoring" global economic and financial developments, signaling that it is uncertain about their potential impact on the U.S. economy. Consequently market expectations for the Fed's next rate hike have been pushed to November, with less than one full 25 bps hike priced in for 2016. In my opinion, there is a good possibility that the Fed will not be as aggressive as previous guidance suggests, and that the U.S. economy is vulnerable, making rising rates a significant impediment in 2016. It appears that the market and even the Fed are increasingly adopting a similar view for 2016.

Gold Bullion Was the True Winner in January

The U.S. dollar held up during January, with the U.S. Dollar Index5 (DXY) down slightly before the BOJ’s announcement on January 29, but rising later in the day to finish the month with a 1% gain. Gold bullion was, however, the true winner in January.  The gold price not only managed to gain in a month when the U.S. dollar also finished higher, but it outperformed significantly, benefiting from its safe haven6 status to close at $1,118.17 per ounce, a gain of $56.75 per ounce or 5.35%. Notably, holdings of global gold bullion exchange-traded products (ETPs) rose by 1.8 million ounces or 3.8% during January.

China and Russia Big Buyers of Gold in 2015

The World Gold Council published its latest World Official Gold Reserves for 2015. The figures rank China (1,762 tonnes, representing 1.7% of total foreign reserves) and Russia (1,393 tonnes, 13%), respectively, as the sixth and seventh largest holders of gold reserves in the world, behind the U.S., Germany, the International Monetary Fund (IMF), Italy, and France. The central banks of China and Russia were both significant buyers of gold in 2015. After announcing its updated gold holdings in June 2015, the People’s Bank of China (PBOC) purchased an additional 104 tonnes of gold in the six months from July to December. This equates to an annualized rate of purchase exceeding 200 tonnes of gold, which is double the average annual rate estimated from the PBOC’s June 2015 update. This suggests China may be stepping up its gold reserves purchases. Russia’s net purchases were estimated at about 185 tonnes of gold in 2015 (not including data for December), representing an increase of about 15% from 2014.

In its latest report Thomson Reuters GFMS Gold Survey estimates that in Q4 2015 total gold physical demand increased by 2.2% year over year, driven primarily by strong growth (23.2%) in official sector net purchases (dominated by Russia and China as explained above) and a 7.0% increase in retail investment in gold bars (driven by strong demand from China and India). While jewelry demand in China dropped by 4%, demand out of India continued to recover, increasing 3% in Q4. The world’s total supply of gold dropped by 7.3% with mine production declining 3.8%.

Gold Stocks Uncharacteristically Underperform 

The performance of gold stocks was mixed in January. The NYSE Arca Gold Miners Index7 (GDMNTR) gained 3.35%, while Market Vectors Junior Gold Miners Index8 (MVGDXJTR) dropped 0.79%. While the underperformance of gold stocks relative to gold is atypical when the price of gold is on the rise, the end-of-year performance of gold stocks was also somewhat out of character. In December, while gold fell to a new cycle low, gold stocks did not follow to new long-term lows and the GDMNTR Index and the MVGDXJTR Index advanced 0.9% and 2.8%, respectively. Perhaps the reversal of that uncharacteristic December outperformance helps explain some of the underperformance in January, along with general weakness in the broader equity market that can also drag down gold equities.

Additional factors affected gold stocks and likely contributed to negative sentiment towards equities during the month. Some companies reported preliminary operating results for 2015 and provided guidance for 2016. While 2015 results were broadly in-line and costs continued to trend down, 2016 production guidance seems slightly below current expectations. Furthermore, base metals and silver underperformed gold in January, affecting valuations of companies with exposure to those metals. Finally, there was company-specific news that had significant negative impact on share prices, which we didn’t always deem as justified. This news included: Eldorado’s planned suspension of its projects in Greece; a material mineral resource revision of Rubicon’s Phoenix project and its impact on Royal Gold’s stream on that project; and the potential fundraising B2Gold may require, given current gold prices, to finance its Fekola project.

The performance gap between gold bullion and gold equities was widest on January 19. Since then the stocks have materially outperformed, closing the gap. As of February 1, the GDMNTR Index and gold were both up 6.3% year-to-date.

Outlook for Gold is Positive

Financial markets in January helped to remind investors around the globe why perhaps every portfolio should have an allocation to gold. It is our opinion that gold should be used mainly as a portfolio diversifier and as a hedge against tail risk,9 i.e., a form of portfolio insurance that attempts to preserve value when tail risk becomes a reality. Gold has virtually little correlation to other financial assets. When most other investments are performing poorly, gold is expected to do well, and vice versa. Worsening financial conditions, escalating geopolitical turmoil in the Middle East, recurring issues with European sovereign debt, currency issues and slow growth in China, Russian aggression, and failure of Japan and the U.S. to reach their economic potential are all potential risks that threaten growth and economic development globally. Gold can act as a financial hedge against these risks.

Gold’s Correlation to Other Assets During Expansions and Contractions since 1987*

02-09-2016 gold-correlation-to-other-assets
 

*As of December 2015. Expansion and contractions as per the National Bureau of Economic Research (NBER).
Source: Bloomberg, NBER, World Gold Council. Historical information is not indicative of future results; current data may differ from data quoted.
 

Many investors use gold stocks to gain leveraged exposure to gold, however, we just finished a one-month period during which the expected outperformance of gold stocks relative to gold did not materialize. We do not expect this trend to continue. As we mentioned, a day after month-end, on February 1, the year-to-date gap between the GDMNTR Index and gold had already closed, and we expect stocks to continue to outperform if the gold price continues to rise. In fact, gold shares should offer their highest leverage to gold when the gold price is close to the cost of production, as is now the case. The leverage comes from earnings leverage; as the gold price increases, the change in a company’s profitability significantly outpaces the change in the gold price. For example, say a gold producer realizes a $200 per ounce margin at current gold prices. At $1,100 gold, a $100 increase in the gold price would increase the producer’s margin by 50%, while representing only about a 9% increase in the gold price. The higher the cost of production, the smaller the margin, and the more leverage companies have to increasing gold prices.

It therefore makes sense that equities should outperform gold during rising gold prices, and underperform if gold falls, unless of course costs are increasing at the same time the gold price is increasing and margins are flat or shrinking. This was the main reason why gold equities underperformed gold in 2011 and 2012, two years during which the gold price increased. Since then positive changes have taken place in the gold mining industry, returning profitability to the sector. We now see the industry in the best shape it has been in for a long time. Unfortunately, this positive transformation of the sector coincided with, and to some extent was intensified by, a period of falling gold prices. As the graph below indicates, however, equities have consistently demonstrated their effectiveness as leverage plays on rising gold during these past years.

Gold Equities: Leveraged Exposure to Gold

02-09-2016 gold-equities-leveraged-exposure-to-gold

Source: Bloomberg. Past performance is no guarantee of future results; current performance may be lower or higher than the performance data quoted. Gold equities are represented by NYSE Arca Gold Miners Index (GDMNTR).  

 

Download Commentary PDF with Fund specific information and performance»  

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Moat Investing: Moats Fortify Against Market Volatility http://www.vaneck.com/blogs/moat-investing-february-2016/ Despite a highly volatile start to the year, moat-rated companies in the U.S. and around the world outperformed their respective broad markets, although it was a negative month for equities overall.

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Van Eck Blogs 2/10/2016 12:00:00 AM

For the Month Ending January 31, 2016

Performance Overview

Despite a highly volatile start to the year, moat-rated companies in the U.S. and around the world outperformed their respective broad markets, although it was a negative month for equities overall. The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) led the S&P 500® Index (-4.90% vs. -4.96%) and the internationally focused Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) beat the MSCI All Country World Index ex USA (-6.58% vs. -6.80%).

Domestic Moats: SE was an Unexpected Leader

Spectra Energy (SE US) was MWMFTR’s star constituent in January. As the general partner of Spectra Energy Partners (SEP US), a natural gas transportation master limited partnership (MLP), Spectra Energy benefited from the MLP’s strong quarterly results and posted gains. Spectra Energy’s robust performance included solid earnings, distributable cash flow, and an impressive distribution coverage ratio despite the current state of energy markets. The company benefits from an expansive network and efficient scale, which tend to increase customer switching costs.

Financial, industrial, and information technology holdings were largely to blame for MWMFTR’s negative monthly performance, and for the drop in the S&P 500 Index as well.

International Moats: Financials Fall

Financial firms out of Hong Kong and China were among MGEUMFUN’s worst performing constituents in January, and Australian financial institutions also had a rough month.

However, several bright spots helped to lift the Index (MGEUMFUN) above the broad international market. Numericable-SFR (NUM FP), a French fiber optics firm, and South American electric utility Empresa Nacional de Electricidad (ENDESA CI) provided welcome boosts to MGEUMFUN’s performance in January.



 

(%) Month Ending 1/31/16

Domestic Equity Markets

 

International Equity Markets

 

(%) Month Ending 1/31/16

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Top 5 Index Performers
Constituent Ticker Total Return
Spectra Energy Corp
 
SE US
 
14.66
Time Warner Inc.
 
TWX US
 
8.92
Wal-Mart Stores, Inc.
 
WMT US
 
8.25
V.F. Corporation
 
VFC US
 
0.56
Western Union Company
 
WU US -0.39

Bottom 5 Index Performers
Constituent Ticker Total Return
Biogen Inc.
 
BIIB US
 
-10.87
CSX Corporation
 
CSX US
 
-11.29
Harley-Davidson, Inc.
 
HOG US
 
-11.87
Polaris Industries Inc.
 
PII US
 
-14.09
American Express Company
 
AXP US
 
-22.73

View MOAT’s current constituents

 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Top 5 Index Performers
Constituent Ticker Total Return
Numericable-SFR SA   NUM FP 8.68  
Empresa Nacional de Electricidad S.A. ENDESA CI   6.00  
Enbridge Inc ENB CN   4.42  
CapitaLand Mall Trust CT SP   4.27  
Sun Pharmaceutical Industries Limited SUNP IN   3.77  

Bottom 5 Index Performers
Constituent Ticker Total Return
Credit Agricole SA ACA FP -15.81
QBE Insurance Group Limited QBE AU -15.98
Wharf (Holdings) Ltd. 4 HK -16.63
Beijing Enterprises Holdings Limited 392 HK -18.13
China Merchants Bank Co., Ltd. Class H 3968 HK -18.81

View MOTI’s current constituents

 
 
 

As of 12/18/15

Morningstar
Wide Moat Focus Index (MWMFTR)

 
Index Additions  
Added Constituent Ticker
Spectra Energy Corp SE US
Biogen Inc BIIB US
VF Corp VFC US
Harley-Davidson Inc HOG US
Kansas City Southern Inc KSU US
International Business Machines Corp IBM US
American Express Co AXP US
Wal-Mart Stores Inc WMT US
Varian Medical Systems Inc VAR US

Index Deletions  
Deleted Constituent Ticker
Applied Materials Inc AMAT US
Autodesk Inc ADSK US
Discovery Communications Inc DISCA US
Walt Disney Co DIS US
ITC Holdings Corp ITC US
Franklin Resources Inc BEN US
Merck & Co Inc MRK US
Procter & Gamble Co PG US
Norfolk Southern Corp NSC US

View Latest MOAT Reconstitution Report
View MOAT’s list of current constituents
 

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

 
Index Additions  
Added Constituent Country
Dongfeng Motor Group China
Ainsworth Game Technology Ltd Australia
Beijing Enterprises Hldgs Ltd China
Technip Sa France
Spotless Group Holdings Ltd Australia
Numericable Sfr Sa France
Enbridge Inc Com Canada
Sun Pharmaceutical Industries India
China Telecom Corp Ltd China
Kingfisher Plc United Kingdom
Elekta Ab Sweden
Ci Financial Corp Com Canada
Sanofi (Sanofi Aventis) France
China Merchants Bank Co China
National Australia Bank Ltd Australia
Qube Holdings (Qube Logist) Ltd Australia
China Mobile Ltd China
Symrise Ag Germany
Linde Ag Germany
Nordea Bank Ab Sweden

Index Deletions  
Deleted Constituent Country
Brambles Industries Ltd Australia
Ioof Hldgs Ltd Australia
Platinum Asset Management Limited Australia
Commonwealth Bank Australia Australia
Sigma Pharmaceuticals Limited Australia
China State Construction International Holdings Ltd. China
Grupo Televisa Sab Cpo Mexico
Burberry Group United Kingdom
Centrica United Kingdom
Johnson, Matthey United Kingdom
Edenred France
United Overseas Bank Singapore
Capitaland Commercial Trust Singapore
Icici Bank Ltd India
State Bank Of India India
Unilever Nv Netherlands
Lafargeholcim Ltd Switzerland
Potash Corp Of Saskatchewan Canada
Cameco Corp Canada
Millicom Intl Cellular S.A. Sweden

View Latest MOTI Reconstitution Report
View MOTI’s list of current constituents

 
 


 
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Fallen Angels Retain Their Halos in 2015 http://www.vaneck.com/blogs/etfs-february-08-2016/ Fallen angels, corporate high yield bonds that were originally issued with investment grade credit ratings, proved more resilient than the broad high yield bond market in 2015. Fallen angels were helped by higher average credit quality and lower average exposure to the energy sector.

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Van Eck Blogs 2/8/2016 12:00:00 AM

Authored by Meredith Larson, Product Manager, ETFs  

Performance Helped by Higher Credit Quality and Lower Energy Exposure

Fallen angels, corporate high yield bonds that were originally issued with investment grade credit ratings, proved more resilient than the broad high yield bond market in 2015.

Generally characterized by higher average credit quality than the broad high yield bond market, fallen angels outperformed by approximately 1.40%, as measured by the BofA Merrill Lynch US Fallen Angel High Yield Index (-3.24%) versus the BofA Merrill Lynch US High Yield Index (-4.64%). Higher average credit quality, lower average exposure to the energy sector, and higher average credit quality within the energy sector were main factors that helped fallen angels end the year ahead of the broad high yield bond market.

Less Weight in Exploration & Production

While the energy sector allocation among fallen angels increased in 2015 (from 4.3% to 13.3%) as the broad high yield bond market’s decreased (from 13.3% to 10.9%), it was fallen angels’ significantly lower yearend industry weight in exploration and production (E&P) that primarily contributed to outperformance. At 0.48%, fallen angels were less exposed to E&P than the broad high yield bond market, which ended 2015 with 4.89% in E&P, arguably one of the energy sector’s more vulnerable industries to the oil price collapse.

Declining oil and commodity prices had a greater relative impact on fallen angels’ 4Q 2015 performance, as fallen angels underperformed the broad high yield bond market by 74 basis points. While the energy sector grew from fallen angel entrants throughout 2015, none were E&P bonds. Furthermore, the fallen angel universe maintained its higher average credit quality, ending 2015 with 81.6% in BB-rated (below investment grade) bonds versus the broad high yield bond market’s 48.4%.

Sector Biases Drove Fallen Angel Performance in 2015

The main drivers of fallen angels' performance relative to the broad high yield bond market remained consistent throughout 4Q and 2015. Based on average sector weights:

  • Positive Influences
    • Energy (underweight)
    • Banking (overweight)
    • Financial Services (overweight)
     
  • Negative Influences
    • Basic Industry (overweight)
    • Healthcare (underweight)
    • Media (underweight)  
     

 

Sector Return Attribution (%):
Fallen Angels Relative to the Broad High Yield Bond Market

 

02-10-2016 Sector Return Attribution
Source: FactSet. Data as of December 31, 2015. Past performance is no guarantee of future performance. Top and bottom five sector attribution of the BofA Merrill Lynch US Fallen Angel High Yield Index for fallen angels versus the BofA Merrill Lynch US High Yield Index for the broad high yield bond market. Figures are gross of fees, non-transaction based and therefore estimates only. Past performance is not indicative of future results. Attribution represents the opportunity cost of investment positions in a group relative to the overall benchmark.
 

While fallen angels had lower average energy exposure in 2015, fallen angel bonds from two energy sector issuers entered the index in January, increasing the allocation to 14.4% versus the broad high yield bond market’s 10.4%, as of January 31, 2016.

 

Learn More About ANGL

Additional resources and information on
Market Vectors® Fallen Angel High Yield Bond ETF (ANGL) »
 
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Munis: Municipals in 2016 http://www.vaneck.com/muni-nation-blog/municipals-in-2016-02-04-16/ The "new normal" is officially dead. You probably read or heard about the now obsolete term in the past year but it doesn’t apply to 2016, where we find ourselves propelled through the first quarter by change, uncertainty, and volatility.

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Van Eck Blogs 2/4/2016 12:00:00 AM The "new normal" is officially dead. You probably read or heard about the now obsolete term in the past year but it doesn’t apply to 2016, where we find ourselves propelled through the first quarter by change, uncertainty, and volatility. Given that we are in an election year when the world’s leading political economies are struggling to find a fertile environment to regenerate growth, it is impossible to overlook the benefits of a well-diversified municipal portfolio.

In December we addressed the question, "What to do?" if and when the Federal Reserve (Fed) began to aggressively move rates higher. Let’s not forget what the winning formula was then and during most of 2015. The factors in play told us to 1) remain calm, 2) continue to take advantage of the steepness of the intermediate part of the muni yield curve, and 3) play the taxable yield equivalent opportunity favoring high yield munis versus corporate high yield.

Despite a vicious selloff in oil precipitating a near free-fall in equities, the Fed continues to have designs on raising rates during 2016. Although global economic forces may ease the inflation scenario near term, the municipal market continues to maintain a rock solid position as the glue holding portfolio valuations stable. As of this moment, both investment grade and high yield indexes are positive so far this year. New issue supply, forecast to be higher in 2016 than last year, has yet to emerge to dampen trading behavior and consequently offers little incentive for portfolio managers to execute changes in strategies. And finally, the year-over-year characteristics of supply/demand that contributed to favorable returns during the past two years will likely again be an important theme in 2016.

It is almost assured that the fundamentals that underpin the broad investing universe will change meaningfully by yearend, leaving perhaps only municipals to retain some semblance of normal behavior. As we saw in the past two years, that result was more than satisfactory.

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China Dominates Emerging Markets Discussions http://www.vaneck.com/blogs/emerging-markets-equity-january-29-2016/ 2015 was a tough year for emerging markets (EM) and there is considerable uncertainty among investors about the asset class as we enter 2016. But we see promising opportunities for growth in China and other EM countries.

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Van Eck Blogs 1/29/2016 12:00:00 AM Fighting the Global Headwinds

2015 was a tough year for emerging markets and there is considerable uncertainty among investors about the asset class as 2016 begins. In 2015 China’s news dominated headlines for most of the year, along with the political and fiscal woes of Brazil and geopolitical events in the Middle East. Commodity prices continued to fall, which, while causing a positive terms-of-trade shock in most of the emerging markets, had a distinctly negative effect on the economies of a few. The Federal Reserve (Fed) finally raised rates after almost a decade and U.S. dollar strength in our view has not been helpful for EM.

With extensive experience in the asset class, we have lived and invested through quite a number of periods of similar angst. As always, we will stick to our philosophy of seeking structural growth at a reasonable price. In many cases, the "price" has become reasonable indeed. Given that we are a fundamental, bottom-up strategy, individual stock selection across the market cap spectrum remains a key contributor to strategy performance. With that said, we can give a sense of where our strategy is positioned in terms of sector and country, describing the context in which our investments operate and are valued.

Financials: We Favor Companies in Real Growth Niches

Generally, the Energy and Materials sectors in emerging markets are very difficult places to find good, non-cyclical growth. In addition, many of the companies in the Telecom and Utility sectors struggle to demonstrate interesting levels of growth. The Consumer Staples sector is a natural area in emerging markets to find structural growth, but it has tended to be very expensive in the last few years and this largely remains the case.

Financials are currently a large weighting for our strategy, but it’s important to dig down into the type of financials that we typically hold. We have a definitive bias towards companies in real growth niches; they are often those providing financial services to the "unbanked." Examples include payday lending in Central and Eastern Europe, pawn shops in Mexico, secondhand truck financing in India, and leasing to small- and medium-sized enterprises in Mexico.

Within the Information Technology sector, demand in terms of hardware, smartphones, tablets, PCs, etc., was sluggish in the fourth quarter of 2015 and the bright spot was the Internet space, as e-commerce and "online to offline" (o2o) grew practically everywhere. Finally, we continue to favor Healthcare, clearly a long-running structural growth story as EM consumers appear to dedicate a higher percentage of their increasingly disposable income to their healthcare spend.

China's Transitional Economy is Providing Opportunities

For any investor in emerging markets, China remains at the forefront of discussions. Likewise, it is a critically important country for our emerging markets equity strategy. Investors remain concerned about the depreciation of the currency, the renminbi (RMB), and a messy deleveraging as China’s economy transitions away from investment-led, state-controlled growth to expansion that is based more on consumption and services.

Watch VideoWatch Semple's latest video for more details on where we see growth opportunities in China . . .  
China Growth Spots in 2016

David Semple, Portfolio Manager

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Overall, we expect lower but better growth from China with continued monetary and fiscal easing. We expect the RMB to depreciate against the U.S. dollar in a modest and fairly controlled fashion, assuming that the U.S. dollar continues to be strong against other major currencies. (That the dollar will be strong is not necessarily our base view, but if it is strong we expect the RMB to weaken, as measured by the bilateral rate.)

We expect a modest cyclical recovery in China's economy, or at least stabilization, in the first half of 2016. This will allow some more breathing room for further significant structural reforms, with more emphasis on supply-side reforms rather than attempts simply to "juice up" demand. We believe more credit issues are likely, as the tidying up of highly indebted, state-owned enterprise (SOE)-related entities continues. In fact, credit growth has picked up nicely in China, but is obscured by the ongoing swap of debt held in local government finance vehicles for municipal bonds.

Our strategy has very little exposure to China’s old, smokestack/SOE complex and we continue to favor areas of China’s economy that are still attractive, such as the environment, internet, healthcare, tourism, and insurance.

India was an EM Bright Spot in 2015

India remains a country of very significant investment opportunity for us, despite some disappointments regarding the pace of reforms. In many ways, India is somewhat of an "island" in the turmoil that has afflicted global economies. We do expect rate cuts in the course of the year, which may help to energize the business cycle that disappointed in 2015.

We See No Easy Answer for Brazil

Brazil is still in a depressed state, with no easy solution to its current issues. To restore confidence will require a political change and/or time, in our view. Although we have a high degree of confidence in the positions we hold and their ability to grow even in the face of economic weakness, we are not inclined to add to risk in Brazil at this juncture.

Quality Growth Bubble

One of the buzz phrases that has been bandied about recently is the "quality growth bubble" in emerging markets, meaning that the valuations of companies that have quality characteristics appear to be at a significant premium to other companies in the emerging markets. We have two points to make about this. First, as far as we can see, this seems to be a problem that is really associated with large-cap companies in emerging markets. Our emerging markets equity strategy is truly an all-cap strategy and we do not see overvaluation among mid- and small-cap "quality growth" companies. Second, we do think that in a world that is relatively starved of growth, the higher relative certainty of growth that tends to come from companies with quality characteristics does deserve a premium.

Optimism for 2016 on the Back of Attractive Valuations

It seems the emerging markets asset class is a bit out of favor right now, and while it is hard to predict the timing of a change in investor sentiment, cheap valuations and negative positioning set the stage for better returns down the road. On a positive note, we anticipate more stability in China’s economic numbers (and less hysteria in the headlines) and we are encouraged that we have started down the road of Fed tightening. A combination of Fed tightening and attractive emerging markets valuations has historically set up good emerging markets performance and we certainly hope that this will be the case in 2016.

Post Disclosure

This blog supports our Emerging Markets Equity strategy which seeks to uncover opportunities that exhibit "structural growth at a reasonable price" ("S GARP") through investment in emerging market securities across all market capitalizations. This means we seek companies transitioning from value to growth that are fueled by a structural shift in country, sector, or stock fundamentals, with prolonged, inherent growth that is neither opportunistic nor event catalyst dependent. We aim to focus on companies with strong and innovative management, robust business models, proven track records, high barriers to entry, and a positive attitude toward minority shareholders.

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Spin-Off in the Spotlight: Madison Square Garden Co. (Ticker: MSG) http://www.vaneck.com/blogs/spin-offs/madison-square-garden-january-2016/ ]]> Van Eck Blogs 1/22/2016 9:24:54 AM

Written by Horizon Kinetics' Research Analysts and CFA Charterholders Ryan Casey and Salvator Tiano, who together bring more than 20 years of combined industry experience to their research roles focusing on domestic and international spin-offs.

Spin-Off Company: Madison Square Garden Co. (Ticker: MSG)
Parent Company:
MSG Networks Inc. (Ticker: MSGN)  

Spin-Off Date: October 1, 2015
GSPIN Index Inclusion Date: January 1, 2016

Madison Square Garden was first added to the GSPIN Index when the company was spun out from Cablevision Systems Corp. (NYSE: CVC) in 2010. At the time, the company was comprised of the New York Knicks (NBA), New York Rangers (NHL) and New York Liberty (WNBA) sports teams, as well as cable channels and an entertainment business that produces concerts and events for its various venues. Perhaps more interesting is the fact that the company also owns a significant amount of valuable real estate; namely, two whole blocks in Midtown Manhattan currently occupied by the Madison Square Garden Arena, which sits atop the busiest transportation facility in the U.S.: Pennsylvania Station.

At the time of the MSG spin-off, revenues from the cable channels were depressed, as the advertising market was still recovering from the recent recession. The entertainment business was also experiencing a cyclical lull due to weaker consumer spending. Still, it was our opinion that the earnings potential of these businesses in a normal economic environment could create a significant amount of share price appreciation.

Additionally, we believed that MSG’s market value did not fully reflect the value of its sports teams and real estate. Whether one viewed these assets as another source of potential value to be unlocked over time or simply as a margin of safety, it was our opinion that the company’s asset value was being significantly underpriced by the equity market. The Index’s methodology dictated MSG’s removal five years later, but not before its shares appreciated by nearly 300%.

This inefficiency persists even today; we believe it is the rationale behind the parent company’s (renamed MSG Networks Inc., NYSE: MSGN) decision to spin-off the Madison Square Garden Co., which contains the sports teams, real estate, and entertainment business. The cable channels will remain with the parent company. Today, Madison Square Garden Co. has a market capitalization of $4 billion, relative to $1.5 billion in cash and, according to Forbes, estimated valuations of $2.5 billion for the Knicks and $1.1 billion for the Rangers. The company currently has no debt and $1 billion in total liabilities. In other words, the company’s current share price implies that virtually no value is being given to its real estate, nor to its entertainment business. Management appears to be aware that its shares are undervalued, having recently announced an authorization to repurchase up to $525 million of Class A common stock, equal to 12.5% of the company at current prices.

As of December 31, 2015, Madison Square Garden Co. represented 1.11% of SPUN's total net assets.

View Current SPUN Fund Holdings  

View Current GSPIN Index Holdings  

 

Spin-Off in the Spotlight provides spin-off research insights from Horizon Kinetics, LLC. The firm has produced spin-off research since 1996, and began covering international spin-offs in 2010. Horizon Kinetics Global Spin-Off Index(GSPIN) is the underlying index of Market Vectors® Global Spin-Off ETF (SPUN), which was launched in June 2015. GSPIN tracks the performance of listed, publicly-held spin-offs that are domiciled and trade in the U.S. or developed markets of Western Europe and Asia.

SPUNMarket Vectors Global Spin-Off ETF

Capture the Full Potential of Spin-Offs Globally  

Key Features:

  • Spin-off investing is an established event-driven strategy
  • Global index coverage
  • Early, long-term stock positions allow index to capture full spin-off cycle

SPUN Details

Fund Ticker SPUN  
Commencement Date 6/09/2015
Gross Expense Ratio2   0.62%
Net Expense Ratio2   0.55%
Distribution Frequency Annually
Index Ticker GSPIN  
Index Rebalancing Quarterly
 
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Marketplace Lending Shows its Strength http://www.vaneck.com/blogs/van-eck-views-january-20-2016/ In my last post, I touched upon the attractiveness of the marketplace lending sector. With global markets experiencing continued volatility, we hope to provide a look into what is driving the relatively attractive returns from online loans.

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Van Eck Blogs 1/20/2016 12:00:00 AM

Jan van Eck: We are very excited about this new asset class. To give you a compelling top-down perspective, my colleagues Bill Ullman, Director, Van Eck Associates Corporation, and Carlos Nogueira, Member of Van Eck's Fixed Income Investment Team have co-authored this special post. Bill Ullman is also Senior Advisor to fintech and marketplace lending companies including: Orchard Platform, Mirador Financial, Drive Sally, and Vetr.  

Yearend Review: Marketplace Lending

2015, and in particular the fourth quarter of the year, was another period of robust growth for the marketplace lending industry. Industry estimates indicate that approximately $15 billion of online loans were originated during the year.1  While the majority of these were unsecured consumer loans, small business, student, real estate, and mortgage loans were also part of the mix. Capital continued to flow into new marketplace loan origination platforms to fund both the loans being originated and the businesses themselves. Strategic transactions — partnerships and mergers and acquisitions — also became part of this young industry as it began to mature and companies sought expanded distribution channels, new technology, and more diversified funding sources. Another key theme underscored in 2015 was that the marketplace lending industry is now a global one, with disruption patterns inherent to the online finance landscape occurring here in the U.S., in Europe, and in Asia.

Industry Performance

Over the course of 2015, the asset class continued to see positive performance with low volatility. The Orchard US Consumer Marketplace Lending Index, which aggregates the investment performance of loans originated by the two largest consumer lending platforms, Lending Club and Prosper, was up 6.24% year to date through November of 2015 and 6.84% over the trailing 12 months through November 2015. This Index was up 8.66% in 2014 and 7.80% in 2013. Over the last nearly three-year period, the Index was up approximately 24.4% in aggregate.2  

Let’s review the key trends one by one.

Continued Rapid Industry Growth

The industry overall has grown at rates sometimes approaching 100% annually (depending on the platform). Looking at Lending Club and Prosper, the two largest platforms in the U.S., we’ve seen nothing short of tremendous growth. In the third quarter of 2014, Lending Club issued approximately $1.17 billion of loans. A year later (3Q '15), the company originated over $2.24 billion of loans, nearly 100% growth.3 Loan origination growth at Prosper was just as impressive, if not more so. There was a total of $3.7 billion of originations on the platform in 2015, up from $1.6 billion in 2014, representing  over 100% year-on-year growth.4 Industry leaders weren’t the only ones to enjoy growth. Social Finance Inc. ("SoFi"), OnDeck, Kabbage, Avant, Funding Circle and many other smaller platforms experienced rapid growth.

Diversified and Institutional Capital Inflows

The continuation of "institutionalized" capital flows into online loans is a key trend to watch as we enter 2016. In the last year — and the last quarter — we have seen rated securitizations of Prosper loans by BlackRock and Citibank; we have seen successive capital raisings by four closed-end funds listed on the London Stock Exchange —all of which invest in marketplace loans; we have seen growing involvement in the industry by registered investment advisers, hedge/private funds, banks, diversified financial institutions, family offices and, of course, individuals. We believe this institutionalization and diversification of capital funding will likely support the marketplace lending industry’s continued growth.

Additionally, major amounts of venture capital and private equity funding have flowed into marketplace lending platforms, allowing them to hire talent, expand operations, and market aggressively to borrowers. SoFi raised over $1.25 billion from Softbank Group Corp. (of Japan) and Third Point Ventures (New York)5, among others. Several smaller platforms raised money from venture capitalists in Series A and Series B rounds, including RealtyMogul.com, AssetAvenue, Lon Operations (dba Bread and/or GetBread), Orchard Platform, and Mirador Financial. Indeed, 2015 was a record year for fintech investment (almost doubling from 2014)6, helping to create the next generation of online lending companies.

Strategic Transactions

Consistent with increased flows of capital into the industry, the frequency of strategic transactions has increased. An example is Prosper’s acquisition of Israel-based financial app company BillGuard. According to Prosper, this transaction has enabled the firm to expand its reach to many more potential borrowers in the U.S. and to do so in an efficient and cost-effective way. Customer (borrower) acquisition remains a major cost and burden for origination platforms and this acquisition appears to directly address that issue for Prosper. A second transaction worth noting is JPMorgan’s partnership with small business lender OnDeck, which was announced in December 2015. This partnership is particularly significant as it shows just how powerful and valuable the technology of these platforms can be, even to a major global financial institution with extensive internal capabilities.

Globalization

The industry is truly a global one, not unlike other internet-disrupted industries such as travel, stock trading, taxis or media. China’s marketplace lending business is larger than that of the U.S.7, and in the UK, consumer lender Zopa recently crossed the £1 billion in outstanding loans milestone.8  

For further information on the industry and more commentary in graphical form, we encourage you to take a look at an article from Crowdfund Insider: Orchard Shares "Most Interesting Charts" of 2015; it offers insights from Orchard about the loans being originated and this rapidly growing industry.

 

 
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Gold Markets Tormented by Rate Hike Intrigue in 2015 http://www.vaneck.com/blogs/gold-commentary-december-2015/ In December, selling pressure pushed gold to a new cycle low of $1,046 per ounce on December 3. Headwinds likely to ease in 2016.

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Van Eck Blogs 1/11/2016 12:00:00 AM

 

For the month ended December 31, 2015

Gold's Response Following Anticipated Rate Hike

During November gold came under pressure and the U.S. dollar strengthened as the market gained conviction for a December Federal Reserve (Fed) rate increase. This selling pressure continued into the early days of December and gold fell to a new cycle low of $1,046 per ounce on December 3. At that point, it appeared that the gold market had already priced in this anticipated rate hike. On December 4, gold gained $24 per ounce despite a strong U.S. payroll report that earlier in the year would have spelled trouble for gold. Gold gained $11 on December 16, the day the Fed announced its a 25 basis point increase in the targeted federal funds rate, the first rate increase in over nine years. Time will tell if this change in direction by the Fed also marks a turning point for gold, but it looks as if there are some prominent investors that might hold this view. As evidence, on December 18 gold bullion exchange traded products (ETPs) booked 18.7 tonnes ($641 million) of inflows, the largest one day increase in four years. Overall for the month, gold was little changed, finishing December down $3.35 at $1,061.42 per ounce.

Gold Shares Positive in December

By contrast, although gold stocks also felt the downward pressure leading up to the Fed’s rate decision, they did not make new lows in December. The low point of this cycle for the NYSE Arca Gold Miners Index (GDMNTR)1 was on September 11. This was the first time since the bear market began in 2011 that the GDMNTR has not followed gold bullion to new long-term lows. For the month, the GDMNTR advanced 0.9%, while the Market Vectors Junior Gold Miners Index (MVGDXJTR)2 gained 2.8%.

Gold funds had a difficult year – tormented by the Fed’s seemingly endless machinations around the timing of a rate increase. For the year 2015 the gold price declined $123 per ounce (10.4%). Gold miners exhibited their leverage to gold with a decline of 24.8% in the GDMNTR and a drop of 19.2% for the MVGDXJTR. The overall downward price trend was interrupted twice by concerns over financial risks. The first came in January when the Swiss broke the franc’s peg to the euro, the European Central Bank (ECB) started a massive quantitative easing (QE)3 program, and radical leadership came to power in Greece. Gold rose to its high for the year at $1,307 on January 22. The second risk driver started in August when China’s stock market collapse panicked markets globally. While these events each created $100 moves in the gold price and substantial increases across gold stocks, in the longer term they were not enough to overcome the negative sentiment brought on by persistent anticipation of rising rates in the U.S. This enabled the U.S. Dollar Index (DXY)4 to make new long-term highs in March and again in December, while bullion ETPs experienced heavy redemptions in July and November. Gold was also pressured by the bear market in the broader commodities complex, shown by the 32% decline in WTI crude and 25% fall in copper for 2015.

Outlook 2016: Worst of Times Beginning to Change?

As the positive moves in the gold price in January and again in August – October have shown, gold responds to heightened levels of financial stress. Gold is commonly used as a portfolio diversifier and a hedge against onerous levels of inflation or deflation, currency turmoil, insolvencies brought on by poor debt and/or risk management by governments and financial institutions, and difficulties caused by overall economic weakness, to name a few. For our investors and clients, we endeavor to identify the systemic risks that might drive the gold price. With the start of the New Year, we make several observations that may offer clues as to where the gold price might trend in 2016.

To begin, it is instructive to look at where the market has been. For gold fund managers, it has been the worst of times. When it seems the market can’t go lower, it finds new lows. In our view, gold and gold stocks are unloved and oversold. We have felt this sentiment before, in the crash of 2008, the grueling bear market from 1996 to 2001, and the epic collapse from 1980 to 1985. The current period of 2011 to 2015 ranks historically among the worst bear markets for gold and gold stocks, as measured by peak-to-trough performance in percentage terms. Given the depth and duration of this bear market, using past markets as guides suggests this market should begin to improve in 2016.

In order for the market to improve, there must be a fundamental driver or drivers. Because of radical monetary policies and unsustainable debt levels globally, the financial system remains quite vulnerable to another crisis event or crash like the tech bust or subprime crisis. However, 2016 may not be the year for such a calamity. Think of German economist Rudi Dornbusch’s famous quote: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

Headwinds to Gold Price Likely to Ease in 2016

We see 2016 as a year when many of the headwinds to the gold price begin to ease. Such headwinds have included:

  • Fed tightening
  • Strong U.S. dollar
  • Weak commodities
  • Rising real rates
  • Rising gold production
  • Market positioning

 

Here is a brief look at each:

Fed Tightening

The Fed has guided towards roughly another one percent in rate increases in 2016, which would probably amount to four 25 basis point increases. Given the extreme caution the Fed has exhibited in getting to this point in the rate cycle, it is hard to imagine it being more aggressive. In fact, we believe there is a good possibility that the Fed will not be as aggressive as its current guidance suggests. In our view, the U.S. economy is no longer capable of generating more than 2% annual growth due to policy uncertainty, the debt burden, and a byzantine tax and regulatory structure that has reached economically stifling proportions. A low-growth economy is vulnerable to impediments and rising rates could become a significant impediment in 2016.

Easy Fed policies have supported growth in residential and commercial real estate as well as booming auto sales. Fed tightening usually increases rates on everything from mortgages and car loans, to the cost of financing fiscal deficits. It looks like the recent decline in the size of U.S. federal deficits will end as Congress has approved a rash of tax breaks and credits that are expected to add more than $800 billion to the debt load over the coming decade. While federal debt is now a staggering 100% of GDP, interest on that debt is at multi-decade lows of around 11% of GDP. Debt service would double if rates returned to the levels of 2007, which suggests that increasing rates could become unpopular politically.

Strong U.S. Dollar

The U.S. dollar had a tremendous run from July 2014 through March 2015 during which the DXY advanced 25% to new long-term highs. It has maintained those gains through December. A strengthening U.S. economy, weak global growth, and anticipation of rising rates drove the dollar’s rise. These drivers are currently already priced in, in our view, which limits the scope for further gains in the dollar.

Weak Commodities

Commodities prices have been hurt mainly by slack demand from China. China is transitioning from a commodities intensive industrial revolution to an economy led by consumerism and services. This transition is in full swing and as overproduction of commodities is being addressed by producers, we believe much of the bad news is already reflected in prices. While it is difficult to see a turnaround in things like oil, iron ore, or copper, we believe that downward price pressure is likely to ease in 2016.

Rising Real Rates

Negative real inflation-adjusted rates are a common characteristic of gold bull markets. In the 2001 to 2011 bull market, real one-year treasury rates bottomed at -3.75% in 2011, around the same time gold reached its all-time high. Since then, real rates have trended upwards, reaching a high of 0.40% in September. The increase in real rates was achieved through a combination of disinflation in the global economy, deflation in commodities, and tightening in Fed policies through QE tapering and guiding market expectations towards higher rates. We believe real rates could fall somewhat in 2016 if inflation picks up as commodities prices stabilize and if tighter U.S. labor markets put pressure on wages. In addition, economic weakness may cause the Fed to reduce its rate outlook.

Rising Gold Production

Gold production has been on the rise since 2009. We expect mine production to begin a slow, permanent decline in 2016, a trend that would increase should the gold price fall further. Credit Suisse calculates 15% of production in its coverage universe is free cash flow negative at $1,100 gold. These marginal mines are no doubt doing all they can to cut costs further, but at lower gold prices, some would likely be forced to shut down. While gold production is not a strong price driver due to large above-ground stocks, we believe evidence of a production decline would nonetheless have a positive influence on prices.

Market Positioning

Gold positioning indicates that bearish bets are at extreme levels that are typical of turning points in the market. Net speculative long positions on Comex5 are now lower than what occurred following the 2013 gold price collapse and are currently at levels last seen in 2002. Gross speculative shorts reached an all-time high in July, and remain at high levels. This points to the heavy exposure hedge funds, commodities traders, and other speculators already have to falling gold prices. Gold held in bullion ETPs is down to levels last seen in early 2009. This suggests that most of the extraordinary gold buying that occurred in ETPs after the financial crisis has been unwound.

We acknowledge that the gold market is on shaky ground and that there is little positive sentiment as the year begins. However, having been through a number of bear markets in our 47 years as gold fund managers, we also know historically that these markets always come to an end and that gold shares offer their highest leverage to gold when the price is close to the cost of production. Perhaps this leverage will be on display in 2016.

 

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