VanEck Blog https://www.vaneck.com/templates/blog.aspx?pageid=12884907249?blogid=2147483856 Insightful, Weekly Commentary on the Municipal Bond Markets 2017-05-22 en-US Why is China Excluded from Global Bond Indices? https://www.vaneck.com/blogs/emerging-markets-bonds/china-exluded-global-bond-indices/ A somewhat incredible fact of global bond markets is that China, the third largest market in the universe, is not included in any major index.

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VanEck Blog 5/19/2017 12:00:00 AM

A somewhat incredible fact of global bond markets is that the third largest market in the universe is not included in any major index. The exclusion of China from global bond indices has merit; the onshore Chinese bond market was, until several years ago, closed to foreign investors. Through a very deliberate, and directionally consistent process of liberalization, onshore Chinese bonds may become a significant weight in many, or most, global bond portfolios within the next two years. The impact on emerging markets bond indices and fund weightings will be even more significant.

The onshore Chinese bond market in total has a market value of approximately US$9 trillion, placing it third between Japan (US$14 trillion) and the United Kingdom (US$6 trillion), according to the Bank for International Settlements.

Total Debt Outstanding by Country
As of September 30, 2016

Total Debt Outstanding by Country  Chart

Source: Bank for International Settlements. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

The recent addition of Chinese Government Bonds (CGBs) and the bonds of three Chinese policy banks to a parallel version of the Bloomberg Barclays Global Aggregate Index included US$2.5 trillion in bonds, more than 5% of the index. CGBs would hold a similar weight in Citi's World Government Bond Index (WGBI) upon inclusion.

J.P. Morgan includes approximately $573 billion of Chinese government bonds in its emerging markets local debt index family, though none of these bonds qualify for its investable benchmarks. If China were included today, it would constitute more than 35% of the GBI-EM uncapped index1, though it would be capped at 10% of the more widely followed GBI-EM Global Diversified Index – the same weight as Mexico and Brazil. J.P. Morgan has had China on "Index Watch" for inclusion in the GBI-EM Global Diversified series since March 2016.

What Steps Has China Taken to Liberalize its Domestic Bond Market?

China has taken several incremental steps over the past fifteen years to open up its onshore sovereign, financial, and corporate bond markets to foreign investors. This began with the introduction of the Qualified Foreign Institutional Investors (QFII) scheme in 2002, followed by the RMB Qualified Foreign Institutional Investor (RQFII) scheme in 2011. Both allow institutional investors that meet certain qualifications to invest in onshore bonds, subject to approval as well as investment quotas, lock up periods, and repatriation limits. Since 2012, investors accessing markets through these programs could access both the exchange bond market as well as the much larger and more liquid interbank bond market, subject to additional approvals.

Significant progress was made to open up the interbank market in 2016 with the introduction of a registration process that allowed certain types of foreign institutional investors to access the market directly, provided they have established proper custodial and clearing accounts. Importantly, this scheme did away with the quotas, lock up periods, and repatriation limits of QFII/RQFII frameworks. In 2017, foreign investors were given the ability to hedge currency risks in onshore derivative markets, and officials recently approved the creation of a "Bond Connect" scheme that will allow foreign investors to purchase onshore bonds through a trading link with Hong Kong.

Opening up China's bond market to foreign investors is a priority for policymakers, and supports ongoing efforts to internationalize the Chinese yuan (CNY) and provide a much needed alternative to domestic financing. In addition, the expected inflows from long-term foreign investors could help to ease domestic outflow pressures currently experienced.

What is Preventing China's Inclusion Today?

Certain issues have prevented China's inclusion in global bond indexes. Despite progress in opening up markets, the operational hurdles to do so remain onerous. Investors must have a local onshore custodian, and the registration process has proven to be somewhat lengthy and burdensome. There is still a need for greater access to onshore hedging tools, and certain tax rules remain undefined for foreign investors.

Most importantly, investors and index providers want some assurance that there will not be any backtracking of the progress made over the past two years. There must be some proof of concept that there would be no restrictions on repatriation of foreign currency when funds sell onshore bonds (i.e., fear of capital controls), particularly in a stressed market environment.

China's Impact on Emerging Markets Bond Indices

Barring what would be a significant step backwards by Chinese policymakers, index inclusion appears inevitable at some point in the foreseeable future. The impact will be significant, with inflows expected to be in the range of US$150 to $300 billion from emerging markets and global bond funds, mostly the latter. Although flows could initially be subdued if active managers choose to underweight China, flows would be increased to the extent that onshore bonds are added to off-benchmark exposures. From an emerging markets index perspective, the higher allocations to China would come at the expense of relatively smaller issuers including Poland, Indonesia and South Africa.

Adding China Reduces EMEA2 Weighting

J.P. Morgan GBI-EM Global Core Index Country Weights
As of April 30, 2017

Country Current Index
Weight
Estimated New
Weight With China
Inclusion
Change
China - 10.0 10.0
Brazil 10.0 10.0 -
Mexico 10.0 10.0 -
Poland 9.9 8.3 (1.6)
Indonesia 9.5 8.0 (1.5)
South Africa 8.7 7.3 (1.4)
Turkey 6.7 5.6 (1.1)
Colombia 6.2 5.2 (1.0)
Malaysia 5.9 4.9 (0.9)
Thailand 5.8 4.9 (0.9)
Russia 5.2 4.4 (0.8)
Hungary 4.0 3.3 (0.6)
Argentina 3.0 3.0 -
Chile 3.0 3.0 -
Czech Republic 3.1 3.0 (0.1)
Peru 3.0 3.0 -
Philippines  3.0 3.0 -
Romania 3.0 3.0 -

Source: J.P. Morgan and VanEck estimates, based on amounts outstanding as of 4/30/2017.

At current yields, China's inclusion would bring down the overall yield on the GBI-EM Global Core Index (3.6% average yield for China versus 6.3% for current index), and would reduce duration slightly. Although the overall yield on the index would decrease at today's yield levels, it's worth noting that CGB yields have risen significantly since reaching their tightest levels in 2016, with the 10-year yield wider by 95 basis points through early May. Index inclusion would also boost liquidity and increase diversification given the moderate correlation of the CNY to other emerging markets currencies.

Further, the CNY has been relatively stable compared to other emerging markets currencies because it is managed against a trade-weighted currency basket, and could therefore play a stabilizing force within the index. Concerns of CNY depreciation have kept foreign investor interest restrained over the last two years, and although further weakness is possible it is worth noting that inflows from potential index inclusion will help to at least partially offset current outflows that have put pressure on the currency's value. On the other hand, increased two-way flows could also result in higher volatility depending on future market conditions.

 

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2Q’17 Investment Outlook: Allocate for Rising Rates https://www.vaneck.com/blogs/allocation/2q-17-investment-outlook-allocate-rising-rates/ We believe that we are in the a rising rate environment both here in the U.S. and abroad, and are recommending that investors take action to protect their portfolios. 

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VanEck Blog 5/17/2017 12:00:00 AM

Watch Video 2Q'17 Investment Outlook  

Jan van Eck, CEO, shares his investment outlook.

Watch Now  



Investors Should Prepare for Slow and Sustained Rising Interest Rates in the U.S.

TOM BUTCHER: Jan, when we spoke last quarter we discussed the changing interest rate environment and various ways in which it could be addressed. Where do you see things going in the second quarter and has your outlook changed?

JAN VAN ECK: Two big things happened in 2016. First, long-term interest rates bottomed at 1.5% and, second, the five-year commodity bear market ended and commodities started rallying. We think that the rise in interest rates will be slow and sustained here in the United States, and we are recommending that investors take action to help protect their portfolios. There are several things that investors can do: they can shorten duration or their interest rate risk; they can go for alternative income; they can take more risk on their bonds (for example, investing in high yield bonds); or they can give their money to an unconstrained bond manager.

Average Cumulative Returns in Rate Hiking Cycles1
August 1983 to March 2017

Average Cumulative Return in Rate Hiking Cycles Chart

Source: Bloomberg; FactSet; St. Louis Federal Reserve Bank; VanEck. Data as of March 31, 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Europe Likely to Follow on Rates

If you look at the rising interest rate cycle in the U.S., we believe that Europe is two years behind us. They are likely to start raising interest rates slowly as well, over the next year or two. This will put additional upward pressure on U.S. interest rates, and it serves as a reinforcement of the multi-year rising rate cycle that we've been talking about.

The other thing we have seen is a very dramatic increase in flows into emerging marketes bonds (EM debt) thus far in 2017. VanEck just came out with a study that shows how different the currency exposure is for EM local currency for fixed income investors compared to emerging markets equity investors. For bond investors, it has cost them about 40% over the last four or five years, but we think that because commodity prices have bottomed, this can actually be a floor. (Read post: Defining Emerging Markets Local Currency Exposure is Critical to Understanding Performance.)

BUTCHER: What does that mean for fixed income investors?

Emerging Markets Fixed Income May Provide Diversification and Yield Benefits

VAN ECK: It means that for investors looking to diversify in a rising rate environment, emerging markets are a good place to look because they have already gone through this correction phase. And if we are right in that commodities have basically bottomed, then it's good. Investors just need to understand that emerging markets currencies do have a downside, and one of the things we have been pointing out is that emerging markets currency exposure for debt/bond investors is very different than it is for equity investors. Over the last several years, emerging markets currencies have cost equity investors almost nothing, but they have cost bond investors the 40% I have mentioned.

BUTCHER: Should investors, then, be looking at local currency or hard currency, when it comes to emerging markets?

VAN ECK: U.S. dollar debt is very tied to the U.S. interest rate environment, so if investors want diversification, and that is what we are recommending, then they have to go for local currencies.

Commodities Recovery Continues Despite First Quarter Weakness

BUTCHER: If we move from fixed income to commodities, in the first quarter commodities actually went down, do you still think that we are in a positive commodity cycle?

VAN ECK: If we are in an average recovery then commodities should rally for about three years. We have the ingredients for a rally. There was a five-year commodity bear market, number one. There was a huge supply reaction, meaning supply of most commodities shrank, which is what you need for a bull market to start. Granted, 2017 year to date has been a bit of a setback, but we still think that this should still be a normal three-year recovery cycle; it just may be an unspectacular cycle. Given that we are already a year into this cycle, this might be a good time for investors to get involved in the asset class.

BUTCHER: Looking at both commodities and fixed income, what is VanEck focusing on at the moment?

Markets in the Current Environment are in a Holding Pattern

VAN ECK: When you consider investor behavior, last year was very odd because until the presidential election in the U.S. almost all the money was going into bonds. People were very conservative. Then there was a ton of equity money that came in November and December following the election. I think right now everyone is relatively relaxed. We have gotten through the first one hundred days of the Trump administration, financial markets are generally well behaved, and global growth is good. Growth is good in Europe and in China. I think investors are trying to figure out what fiscal policy, what tax policy, will ultimately change in the U.S., if any. We are in a bit of a holding pattern right now, awaiting more news.

BUTCHER: Are you seeing a shift in attention from monetary policy to fiscal policy now?

VAN ECK: Yes. If we are right that we are in a slow, increasing interest rate environment -- the Federal Reserve has raised rates once already this year and they're trying to be very deliberate about it, and if Europe gets on that train -- then the only changing policy will be fiscal policy and taxing. That is what we have to focus on as investors.

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Interesting April Provides Insight on Gold Market https://www.vaneck.com/blogs/gold-and-precious-metals/april-insight-on-gold-market/ Gold’s positive momentum continued in April.  Bullion gained 1.52%, driven primarily by weaker than expected U.S. economic data, while gold shares underperformed.

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VanEck Blog 5/12/2017 12:00:00 AM

Contributors: Joe Foster, Portfolio Manager, and Imaru Casanova, Deputy Portfolio Manager/Senior Analyst for the Gold Strategy

Weaker U.S. Dollar, Investment Demand Sustains Gold's Momentum in April

Gold's positive momentum continued in April. Bullion traded as high as $1,289.60 per ounce on April 18, driven primarily by weaker than expected U.S. economic data. Most notably, figures released in the U.S. jobs report were below expectations and additionally, U.S. factory output surprised on the downside. Gold also gained support from comments by President Trump, during an interview on April 12, in which he stated that the U.S. dollar was getting too strong and that he would prefer that the Federal Reserve keep interest rates low. The U.S. Dollar Index1 (DXY) weakened 1.30% during the month. By April 18, markets were not pricing in another Fed rate hike in June, with the implied probability at only 43.7%. However markets perceived the outcome of the first round of the French presidential elections positively, fueling risk-on sentiment, and pushing down the price of gold in the last week of April. As of May 1, markets were attaching approximately a 70% probability to a June Fed rate hike and a 72% probability to a July hike. Gold ended April at $1,264 per ounce, up $18.94 or 1.52%.

Demand for gold bullion backed exchange traded products (ETPs) picked up again in April with holdings up approximately 1.4% for the month and 4.6% year to date. We track flows into the gold bullion ETPs as we think investments in those products typically represent longer term, strategic investment demand for gold and, as such, provide an excellent proxy for the direction of the gold market.

Gold Stocks Display Rare Behavior Relative to Bullion

Gold stocks underperformed the metal, which is atypical for a period in which the price of gold increased. The NYSE Arca Gold Miners Index2 (GDMNTR) fell 1.9% and the MVIS Global Junior Gold Miners Index3 (MVGDXJTR) dropped 10.8% during the month.

We believe the underperformance of the smaller-cap, junior miners group is related to trading activity following an Index announcement on April 12, 2017, indicating an upcoming rule change for the MVIS Global Junior Gold Miners Index. This upcoming rule change expands the universe of companies eligible for inclusion in the Index effective June 17, 2017. It appears to us that the market's reaction was to sell, ahead of the Index rebalancing date, those companies that are expected to be reduced to make room for the new companies that will be added, resulting in significant selling pressure. We expect some volatility in the share price of the junior companies making up the Index to continue until the June Index effective date. However we view this share price action as temporary, and expect a return to more normal trading activity with the fundamental aspects of the stocks driving their price in the longer term.

In the case of large-cap equities, the underperformance was driven by a 12% drop in the share price of Barrick Gold.4 On April 24, Barrick reported 1Q 2017 results that missed expectations, primarily due to operational issues that the company expects to resolve shortly. However this was received very negatively by markets, which have become accustomed to Barrick consistently meeting or exceeding expectations during the past couple of years. Although there were a few other negative surprises, overall, the seniors and mid-tier companies reported 1Q results that met or exceeded expectations.

Gold equities should outperform gold bullion during rising gold prices and underperform if gold prices fall. Although this expected relative performance may not hold during certain periods (as was the case in April), gold equities have consistently demonstrated their effectiveness as leverage plays on gold during the past several years as shown in this chart.

Gold Stocks Typically Provide Leverage to Bullion
2012-2017

Gold Stocks Typically Provide Leverage to Bullion Chart

Source: Bloomberg. As of April 28, 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Gold Market in April Provides Insight for 2017 and Beyond

It is conceivable that the gold market for the year 2017 may end up looking like it did in April; i.e., characterized by short rallies followed by pullbacks, as the market's assessment of the health and prospects of the U.S. economy and the Fed's rate outlook lifts or depresses the gold price. We see the gold price well supported within a range centered on the $1,250 per ounce level in 2017, as it establishes a new base that started forming in 2016. There is potentially significant risk and uncertainty that could drive the gold price higher, and it certainly seems possible that the geopolitical or financial outlook could turn negative rather quickly. Beyond 2017, adverse events, we believe, become increasingly likely as the post-crisis expansion ages and if the bull market in stocks and bonds loses steam. These are the types of "risk-off" events that we believe will likely compel investors to seek protection by investing in gold and gold equities.

Gold Stocks Typically Provide Leverage to Gold and Current Valuations Remain Attractive

Gold mining equities offer leveraged exposure to gold. The leverage comes from earnings leverage; as the gold price increases, the change in the company's profitability significantly outpaces the change in the gold price. In addition, at higher gold prices, in-the-ground resources have a higher value, and the company's exploration efforts, project expansions, operational improvements, and potential acquisitions also become more valuable. This explains why gold stocks trade at premium valuation multiples. Looking at historical valuation levels, as illustrated by the price-to-cash flow chart below, we see that stocks are currently trading at multiples that are below the long-term average, and well below the multiples reached during the peak of the last bull market.

Historic Price-to-Cash Flow of Gold Majors and Mid-Tiers
2006-2017

Historic Price-to-Cash Flow of Gold Majors and Mid-Tiers Chart

Source: RBC Capital Markets. Data as of March 17, 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Agnico-Eagle Mines: What Makes a Premium Rated Gold Stock

We look at relative valuations among our coverage universe to identify undervalued and overvalued stocks. Stocks that trade at above average multiples may be too expensive, or they may be deserving of a higher multiple derived from their higher growth potential (as measured, for example, in free cash flow per share and not just in ounces) and lower risk profile. A look into one of our strategy's top holdings, Agnico-Eagle Mines,5 is helpful in understanding what it takes to be a premium rated stock in the gold market.

Listed below are some of the primary reasons we believe the Agnico-Eagle Mines stock deserves a premium rating:

  • A track record of consistently meeting or beating expectations in recent years. Agnico's 1Q 2017 results released at the end of April once again exceeded estimates for earnings, production, and costs. In addition, the company increased its production guidance for 2017.
  • A strong, experienced management team. Sean Boyd has been Agnico's CEO since 1998 and has been with the company since 1985. He was one of the few CEOs to survive the sector-wide management changeover that occurred a few years ago. Many members of Agnico's management team have been with the company for more than a decade. This continuity, we believe, is tightly linked to the company's success. Agnico has by no means escaped the perils of the gold mining industry. In 2011, its Goldex mine (now back in production) had to be shut down due to rock failure that led to ground subsidence and stability issues, and the write-off of the company's investment in Goldex. Travails in Finland, during the start-up of its Kittila mine in 2009, are also part of the company's recent history. In our view, this diversity of experiences, combined with key management continuity, has shaped Agnico into the industry leader it is today.
  • Unmatched growth potential among the senior gold producers. We estimate Agnico's five-year production growth at more than 25%, leading to a corresponding growth in operating cash flow. In contrast most other seniors are struggling to sustain production.
  • The right number of operations in the right places. Agnico operates five mines in Canada, one in Finland, and two in Mexico. This is right about the maximum number of operations and regions we like to see gold companies managing, and they are all in "mining friendly" jurisdictions.
  • Potential for further discoveries. Agnico has had a successful strategy of finding or acquiring new projects by combining a consistent focus on exploration with investment in early-stage opportunities/companies. Agnico is currently developing the high-grade Meliadine project in Nunavut, Canada, with reserves of 3.4 million ounces, and the Amaruq deposit, a satellite deposit to the existing Meadowbank operation.

Gold Sector Has Transformed Into a Healthy, Cash Flow Generating Business

We have written extensively about the positive, post bull market transformation of the gold sector into a healthy, cash flow generating business, offering attractive returns. A re-rating of the entire sector to reflect this transformation is justifiable in our view. Companies need to continue to demonstrate that they are deserving of the premium valuation multiples they have historically enjoyed. The formula, although complex, is not too complicated: Increase the potential and ability to develop gold deposits into profitable and sustainable mines while reducing the risks associated with those developments, and these companies should enjoy a re-rating by the market.

Download Commentary PDF with Fund specific information and performance

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NDRMX Marks Anniversary with Great Start https://www.vaneck.com/blogs/allocation/ndrmx-marks-anniversary-great-start/ VanEck NDR Managed Allocation Fund marks its one year anniversary today, having launched on May 11, 2016. The Fund celebrates with strong performance results relative to its benchmark.

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VanEck Blog 5/11/2017 12:00:00 AM

VanEck NDR Managed Allocation Fund

VanEck NDR Managed Allocation Fund (NDRMX) tactically adjusts its asset class exposures each month across global stocks, U.S. fixed income, and cash. It utilizes an objective, data-driven process driven by macroeconomic, fundamental, and technical indicators developed by Ned Davis Research ("NDR"). The Fund invests based on the weight-of-the-evidence of its objective indicators, removing human emotion and decision making from the investment process. The expanded PDF version of this commentary can be downloaded here.

Fund Celebrates 1-Year

VanEck NDR Managed Allocation Fund celebrates its first anniversary today, having launched on May 11, 2016. In its first year, the Fund has maneuvered through no shortage of exciting events: Brexit, the U.S. elections, rising interest rates, potential government policy reform, escalating geo-political tensions, and the list goes on. All of this uncertainty can be troublesome. Fortunately, uncertainty works to the Fund’s benefit since our investment process removes human emotion, which can often lead to the mistakes that can plague performance.

This process has led to strong results. Since inception, the Fund has returned 11.27% versus 9.97% compared to its benchmark 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) index.1 The Fund has also exhibited strong performance relative to its peers in the Morningstar Tactical Allocation category, ranking in the top quartile of the category since inception through the end of April.2

Fund Positioning May 2017

Coming into May, VanEck NDR Managed Allocation Fund's (NDRMX) exposure to stocks was reduced from 81.0% to 75.5% and the bond exposure increased from 18.4% to 24.3%. Regional equity positioning shifts include initiating exposure to the Emerging Markets and increased exposure to Europe ex. U.K. Decreased regional positions include a reduction of exposure to Pacific ex. Japan and the U.K. The U.S. market cap and style positioning changed significantly. The Fund increased its positioning to large-cap growth exposure to small-cap growth and value decreased.

Fund Positioning May 2017 Pie Charts

Source: VanEck. Data as of May 2, 2017.

April 2017 Performance Review

The beginning and end of April were very different. The first half of the month was dominated by geopolitical risks, primarily the escalating tensions between the U.S. and both Syria and North Korea. This sent the S&P 500® Index down 1.35% by mid-month. Stocks then turned the corner in the second half of the month, with the S&P 500 Index returning 2.41%. Stocks were lifted by strong reported earnings and the French presidential election. In the U.S., the focus remained on President Trump’s pro-growth agenda and the repeal of the Affordable Care Act.

For the month of April, VanEck NDR Managed Allocation Fund's (NDRMX) returned 1.29% versus the benchmark return of 1.27%. Asset class positioning was the largest contributor to performance, due to the Fund’s significant overweight exposure to stocks relative to bonds. The largest regional equity contributors to performance were the overweight exposure to Europe ex. U.K. and the absence of exposure to Canada. The largest regional equity detractors from performance were the significant overweight exposure to Pacific ex. Japan and having no exposure to the Emerging Markets. The U.S. cap and style positioning benefited from overweight exposure to growth over value stocks.

On a since inception (5/11/16) basis, as mentioned earlier, the Fund continues to outperform its benchmark with a return of 11.27% return versus 9.97%.

Total Returns (%) as of April 28, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.29 11.27
Class A: Maximum 5.75% load -4.52 4.89
60% MSCI ACWI/
40% BbgBarc US Agg.1
1.27 9.97
Total Returns (%) as of March 31, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.31 9.85
Class A: Maximum 5.75% load -4.51 3.55
60% MSCI ACWI/
40% BbgBarc US Agg.1
0.75 8.59

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at net asset value (NAV). Index returns assume that dividends of the Index constituents in the Index have been reinvested.

Returns less than a year are not annualized.

Expenses: Class A: Gross 3.60%; Net 1.38%.
Expenses are capped contractually until 05/01/18 at 1.15% for Class A. Caps exclude certain expenses, such as interest.

Weight-of-the-Evidence: News We Do Not Use

The CBOE VIX Index is often referred to as the "fear index” and measures the implied volatility of the S&P 500 Index, or more simply stated, the near-term expectations of price fluctuations in the stock market. Higher index levels indicate that in general, the market expects higher levels of volatility in the short term. Recently, the CBOE VIX Index has been in the news after plunging to a 10-year low (an intraday reading of 9.9) on May 1. But, this is news that we do not use. Here is why.

To put the significance of this low Index level into perspective, the average level of the Index, since inception is 19.67. It has only closed below 10 on 9 trading days out of over the 6,000 trading days since 1993. So, the CBOE VIX Index at its current low level is indeed a rare event.

Does this mean that higher volatility is on the near-term horizon? Looking just at the 10 trading days when the index closed below 10 offers little to no information. However, if we look at slightly higher levels of volatility, but still extremely low relative to its history, we gain significantly more data points. The table below shows that, historically, very low levels of implied volatility have not translated into higher near-term market risk.

CBOE VIX Index Level # of Occurances in days Average CBOE VIX Index Level 30 Days Later Average CBOE VIX Index Level 60 Days Later Average CBOE VIX Index Level 90 Days Later
<11 136 12.03 12.54 12.93
<12 602 12.36 12.78 13.04
<13 1172 12.8 13.13 13.36

The conclusion is that the CBOE VIX Index at these extremely low levels, in isolation, is not indicative of increased near-term risk. While the volatility of the market is eerily quiet and may feel like "the calm before the storm,” it is news that we cannot use.

One indicator that does give good insight into the direction of future price movements in the market is seasonality. It is a simple yet potent indicator that measures the historical price patterns that result from the market’s recurring tendencies. This indicator is important now because it changed from bullish to neutral in May.

As you can see from the chart below, March and April have been strong performing months for stocks, while the spring and summer months, starting in May and ending in October, have historically lagged.

NDR Seasonality Indicator, 2012 to 2017

NDR Seasonality Indicator, 2012 to 2017 Chart

Source: Ned Davis Research. Data as of April 30, 2017.
Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

Seasonality is the only indicator to change in May, out of 11 indicators that determine the allocation to stocks and bonds. The chart below shows that the Global Stocks/Bond Composite, or aggregation of indicators, is now less bullish. This caused the stock allocation to decrease from 80.9% to 75.5%.

NDR Stock/Bond Overall Composite Indicator, 2012 to 2017

NDR Stock/Bond Overall Composite Indicator, 2012 to 2017 Chart

Source: Ned Davis Research. Data as of March 31, 2017.
Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

Additional Resources

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Global Moats Get Boost from China and France https://www.vaneck.com/blogs/moat-investing/moats-get-boost-china-france/ Moat companies in the U.S. were boosted in part by China, while France led the way for international moat companies. Both segments continue to impress thus far in 2017.

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VanEck Blog 5/10/2017 12:00:00 AM

For the Month Ending April 30, 2017

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") posted strong returns in April and outpaced the S&P 500® Index (1.97% vs. 1.03%). The U.S. Moat Index extended its outperformance of the S&P 500 Index to nearly 3.00% for the year-to-date period (10.12% vs. 7.16%). International moat stocks, as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), performed mostly in line with the MSCI All Country World Index ex USA for the month (1.97% vs. 2.14%), but maintained their outperformance gap for YTD 2017 (13.26% vs. 10.17%).

U.S. Domestic Moats: Yum!

Yum China Holdings (YUMC US, +25.44%) was a standout performer in the U.S. Moat Index in April. The firm was spun out of another current Index constituent, Yum! Brands, Inc. (YUM US) in October 2016. YUMC US has since operated as a standalone business that licenses the Yum! Brands and is poised to benefit from the growing consumer base throughout China. Other consumer discretionary firms such as L Brands, Inc. (LB US, +12.12%), which offers the Victoria's Secret brand, helped elevate the consumer discretionary sector to the top contributor to U.S. Moat Index returns for the month. Information Technology companies and Industrials firms were also strong contributors for the month. The primary detractors from U.S. Moat Index performance in April were healthcare companies, particularly pharmaceutical supply chain companies. Express Scripts Holding Co. (ESRX US, -6.93%) saw its fair value estimate lowered by Morningstar analysts due to the near term impact of expectations that Anthem, Inc. will not renew its contract with the firm following its expiration in 2017. McKesson Corp. (MCK US, -6.72%) and AmerisourceBergen Corp. (ABC US, -7.29%), other major pharmaceutical distributors, also struggled in April.

International Moats: Merci Beaucoup

French aerospace firm Safran SA (SAF FP, +10.52%) edged out London Stock Exchange Group Plc (LSE LN, +10.38%) as the top International Moat Index performer in April. SAF FP also saw its fair value estimate increased by Morningstar analysts at the end of the month. The top sector performers for the month came from real estate and industrials firms. Several Hong Kong property firms helped boost the real estate sector including Swire Properties Ltd. (1972 HK, +6.78%) and Cheung Kong Property Holdings Ltd. (1113 HK, +6.51%). While France was the top contributing country to International Moat Index returns, companies in Canada and India were the most significant detractors. Baytex Energy Corp. (BTE CN, -11.27%), an oil & gas exploration & production company focused on Western Canada and the Williston Basin in the U.S., was the worst performing company in the International Moat Index in April.

(%) Month Ending 4/30/17

Domestic Equity Markets

International Equity Markets

(%) As of 4/30/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 4/30/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
Yum China Holdings, Inc. YUMC US 25.44
L Brands, Inc. LB US 12.12
TransDigm Group Incorporated TDG US 12.07
Cerner Corporation CERN US 10.03
Guidewire Software, Inc. GWRE US 9.16

Bottom 5 Index Performers
Constituent Ticker Total Return
Wells Fargo & Company WFC US -3.27
Twenty-First Century Fox, Inc. Class A FOXA US -5.71
McKesson Corporation MCK US -6.72
Express Scripts Holding Company ESRX US -6.93
AmerisourceBergen Corporation ABC US -7.29

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
Safran SA SAF FP 10.52
London Stock Exchange Group plc LSE LN 10.38
Bureau Veritas SA BVI FP 9.49
MGM China Holdings Limited 2282 HK 9.30
Genting Singapore Plc GENS SP 9.28

Bottom 5 Index Performers
Constituent Ticker Total Return
Tata Consultancy Services Limited TCS IN -5.66
Dongfeng Motor Group Co., Ltd. Class H 489 HK -6.37
Infosys Limited INFO IN -9.09
Telstra Corporation Limited TLS AU -11.22
Baytex Energy Corp. BTE CN -11.27

View MOTI's current constituents

As of 3/17/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
L Brands Inc LB US
CVS Health Corporation CVS US
Yum China Holdings Inc YUMC US
TransDigm Group TDG US
Guidewire Software GWRE US
Cerner Corp CERN US
Quintiles IMS Holdings, Inc. Q US
Yum! Brands Inc YUM US
Zimmer Biomet Holdings Inc ZBH US

Index Deletions
Deleted Constituent Ticker
Berkshire Hathaway B BRK.B US
American Express Co AXP US
US Bancorp USB US
CSX Corporation CSX US
Deere & Co DE US
Norfolk Southern Corp NSC US
Harley-Davidson Inc HOG US
Tiffany & Co TIF US
Time Warner Inc TWX 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
Sina Corp (Caymans) China
KION Group AG Germany
Cemex SA CPO Mexico
Telefonica SA Spain
Ramsay Health Care Ltd Australia
KDDI Corp Japan
Sanofi-Aventis France
Shire Plc United Kingdom
Tata Motors Ltd India
China Mobile Ltd. China
Rakuten Inc Japan
Baytex Energy Corp. Canada
KBC Group NV Belgium
Nidec Corp Japan
DBS Group Holdings Singapore
Bayer AG Germany
Novartis AG Reg Switzerland
ENN Energy Holdings Ltd China
GlaxoSmithKline United Kingdom
Kao Corp Japan
Nippon Tel & Tel Corp Japan
Meggitt United Kingdom
Sonic Healthcare Ltd Australia
Potash Corp of Saskatchewan Canada
Ambev S.A. Brazil

Index Deletions
Deleted Constituent Country
Bank of Montreal Canada
Canadian Imperial Bank of Commerce Canada
National Bank of Canada Canada
National Australia Bank Ltd Australia
Westpac Banking Corp Australia
Commonwealth Bank Australia Australia
Computershare Ltd Australia
Vocus Group Limited Australia
Blackmores Ltd Australia
Woolworths Ltd Australia
CSL Ltd Australia
London Stock Exchange Plc United Kingdom
China Telecom Corporation Ltd. China
China State Construction International
Holdings Ltd.
China
Orange France
Schneider Electric SE France
Kering France
Mobile TeleSystems PJSC Russian Federation
Infosys Ltd India
Seven & I Holdings Co Ltd Japan
Grifols SA Spain
Symrise AG Germany
Alfa Laval AB Sweden
Galaxy Entertainment Group Ltd. Hong Kong
Wynn Macau Hong Kong

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



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Fallen Angels: When Higher Credit Quality Matters https://www.vaneck.com/blogs/etfs/fallen-angels-higher-credit-quality-matters/ Higher credit quality is just one reason income investors may want to consider fallen angels as a complement to their high yield bond allocations.  

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VanEck Blog 5/5/2017 12:00:00 AM

Fallen angel high yield bonds were up 4.8% year to date through April 30, outperforming the broader high yield bond market which rose 3.9%.1 (This follows 2016's strong performance which we wrote about in Fallen Angels Close 2016 on Cloud Nine.) Optimism over potential tax reform has helped spreads tighten recently, and they may have room to narrow further should some of the Trump administration's reform efforts play out. There is, however, uncertainty surrounding the administration's ability to get its tax reform proposal passed, and geopolitical events could stir up broad market volatility.

Given these uncertainties, high yield bond investors may want to ratchet up the credit quality of their portfolios. Fallen angels can be a source of higher quality high yield for investors, given about 77% of the universe was concentrated in BB-rated bonds (just one ratings notch below investment grade) as of April 30, 2017.2 This compares to the broader high yield bond universe's 48% concentration in BB-rated bonds. Furthermore, this higher average credit quality has been accompanied by more attractive rising star and default rates, historically. Fallen angel bonds have boasted higher "rising star" success than original-issue high yield bonds ― meaning more fallen angels have risen back up to investment grade status (5.3% versus 2.6% averaged annually).3 Finally, fallen angel bonds have experienced lower average default rates versus original-issue high yield bonds (3.5% versus 4.5%),4 making them a potentially attractive high yield option from a credit risk perspective.

VanEck Vectors® Fallen Angel High Yield Bond ETF (ANGL) Consistently Outperformed Peers5

ANGL - Performance Relative to Peer Group 3-31-2017 Chart

Source: Morningstar. Data as of March 31, 2017.
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. 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. The high yield bond peers category is represented by the Morningstar Open End Funds – U.S. – High Yield Bond category. See index descriptions below.

How Fallen Angel Sector Exposure Has Made a Difference

The volume of fallen angel bonds in the market is increased primarily by deteriorating fundamentals of individual investment grade bond issuers and by economic events that have weakened entire industry sectors (as seen in early 2016 in the energy sector with the aftermath of the 2014 oil price collapse). While negative events can help to broaden the fallen angel universe, they also present potential opportunities for investors to pick up discounted credits. By adopting a passive fallen angel index approach, as offered by ANGL, investors are following a contrarian investment allocation by effectively buying into the market while others are selling out. While not always the case, overselling pressure on investment grade bonds prior to being downgraded to high yield status has helped uncover value, on average, in the fallen angel high yield subset.

Past cycles of increased fallen angel volume have also resulted in differentiated sector allocations over the years that have meaningfully contributed to returns. Sector allocations, as of the end of April 2017, show fallen angels were overweight energy and basic industry by 10% and 14%, respectively. Similar to calendar year 2016, when commodities prices rebounded from February lows, the energy and basic industry sectors were among the largest overweights that have contributed to outperformance this year, as shown below.

Year-to-Date Top/Bottom Three Sector Performance Attribution
As of April 30, 2017

Year-to-Date Top/Bottom Three Sector Performance Attribution
Year-to-Date Top/Bottom Three Sector Performance Attribution B

Source: FactSet. Data as of April 30, 2017. Source: 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. Average under/overweights presented are from the top/bottom-three sectors illustrated and represent their average under/overweight since 12/31/2016 through 4/30/2017.

It should also be noted that sector differences versus the broad high yield bond market have been shown to help offset some of the negative impact of rising interest rates. Since the inception of the H0FA Index, fallen angels have outperformed broad high yield bonds four out of the last five calendar years when interest rates have risen 1% or more.6 This is significant, as fallen angels, which currently average about a 6.4 interest rate duration, have averaged higher interest rate sensitivity than the broad high yield bond market, which currently average an approximate 4.0 duration.7

How Fallen Angels May Complement High Yield Portfolios

Income investors may want to consider fallen angels as a complement to their high yield bond allocations given their higher credit quality. Fallen angels' higher average credit quality than original-issue high yield bonds may help absorb more of the potential broader market volatility that may occur in stressed markets. At the same time, investors should consider the group's overweights to the energy and basic industry sectors, and factor in views on oil prices, which have meaningfully influenced returns in these two sectors. Historically, differences in sector allocations versus broad market high yield bonds have, on average, helped offset some of the negative impact from rising interest rates.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) received a three-year and overall five-star rating from Morningstar, as of March 31, 2017.8 ANGL was rated against 596 funds in Morningstar's high yield bond category 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 »

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Evaluating the Impact of Green Bonds https://www.vaneck.com/blogs/etfs/impact-of-green-bonds/ Green bonds can provide income with impact, but how can investors evaluate the environmental benefits?

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VanEck Blog 4/28/2017 12:00:00 AM

This is the third in a series of blogs featuring green bond investing. Please read our early posts: The Investment Case for Green Bonds and The Rise of Green Bonds.

In previous posts, we have described how green bonds help investors fulfill their fixed income investment objectives and, at the same time, make a positive impact on the environment (notably by financing projects that help to address climate change). Hence: Income with impact. In simple terms, green bonds can achieve these dual goals because they are much like plain vanilla conventional bonds and have the added benefit of an environmentally friendly purpose.

How can investors evaluate a green bond's impact?

Issuer reporting is a core component of the Green Bond Principles, and can provide an important tool for investors to assess impact. The Green Bond Principles were established in 2014 and provide a common green bond issuance framework to help promote the integrity and development of the green bond market. There are four core components:

  1. Use of Proceeds: Proceeds should fund projects with clear environmental benefits, with clear disclosure in legal documentation.
  2. Project Evaluation and Selection: Issues should outline a process to determine project eligibility and sustainability objectives.
  3. Management of Proceeds: Proceeds should be ring-fenced or tracked through a formal internal process.
  4. Reporting: Annual disclosure of the use of proceeds and qualitative and quantitative performance measures.

A defining characteristic of green bonds since the market's inception has been the focus on disclosure. In particular, specifying the use of proceeds provides investors with a way to easily identify green bonds and an additional layer of transparency compared to conventional bonds. In addition, the Green Bond Principles encourage issuers to report annually on their green bonds, outlining the amounts allocated to specific projects and their expected environmental impacts, based on both qualitative and quantitative measures. An excellent example is Apple's recently published annual report on its green bond issuance, in which the company outlines how it invested its green bond proceeds so far.

Thanks to the reporting provided by issuers like Apple, investors can now get a sense of the impact a green bond is having on climate change. However, there is still progress to be made on impact reporting. Reporting is not consistent across issuers, and comparisons are challenging due to the different methodologies and assumptions for calculating the potential impact of a project. Availability of data can also be an issue.

Fortunately, there has been an increased emphasis on progressing towards harmonized methodologies and consistent reporting. Progress is being driven by investor demand, as well as a common interest from issuers, underwriters, and regulators in seeing the green bond market grow. In addition, significant work is being done by firms such as S&P Global Ratings to provide new tools to evaluate the impact of green bonds, which may help investors estimate climate impact in a standardized way across bonds, or in cases where reported data may be insufficient.

Case Studies: U.S. Corporate Green Bonds

Apple is not the only major U.S. corporation to issue a green bond. Below we list other U.S. corporate bond issues included in the S&P Green Bond Select Index ("SPGRNSLT" or the "Index") in which the issuer has made green bond project impact estimates publicly available on their respective websites. We have included descriptions of these companies' green bond issuances, and a table summarizing key information and data points:

  • Apple: Apple's green bond issued in 2016 was the largest to date by a U.S. corporation. The bond was issued following the Paris Climate Agreement to demonstrate how businesses can be leaders in reducing greenhouse gas emissions globally. Projects funded by the bond include green buildings, renewable energy sources to power data centers, and robotic technology to disassemble used iPhones and preserve high-quality components.
  • Bank of America: Bank of America's 2015 green bond was its second issuance, and the company issued a third bond in late 2016. Proceeds helped fund energy efficiency projects in several small towns, residential solar systems, and wind power facilities.
  • Georgia Power Company: Georgia Power was the first U.S. electric utility to issue a green bond. Proceeds were used to finance several solar projects in Georgia.
  • MidAmerican Energy: MidAmerican Energy owns more wind-powered electricity generating assets than any other U.S. utility, and upon completion of two projects in Iowa that its green bond issued in 2017 will help finance, annual renewable energy generation from wind and will satisfy 89% of Iowa customer's annual usage, moving the company towards its goal of 100%.
  • Morgan Stanley: Projects financed by Morgan Stanley's green bond issued in 2015 include several wind farms in Texas, as well LED lighting upgrades of a Morgan Stanley office building in New York City.
  • Southern Power Company: Southern Power was the first investment grade power producer in the U.S. to issue a green bond. Projects financed by its 2015 bond issues include solar facilities in California and Georgia, and a wind power facility in Oklahoma.
  • Westar Energy: Westar Energy's green bond issued in 2016 will fund a wind farm in Kansas, which will generate approximately 1/3 of the total energy used by the company's customers.

Select U.S. Green Bonds and their Environmental Impact

Issuer Use of Proceeds Renewable Energy Capacity (MW) # of Households Potentially Powered by Energy Generated CO2 reduction (metric tons per year) Water Saved (thousands of liters per year) Waste diverted (metric tons per year)
Apple Renewable energy, energy efficiency, safer materials, resource conservation 127 14,900 191,500 20,209 6,670
Bank of America Renewable energy, energy efficiency 1786 471,000 1,531,800 37,947,000 14,909
Georgia Power Company Renewable energy 152 8,407 63,885
MidAmerican Energy Renewable energy 888 946,000 9,706,877
Morgan Stanley Renewable energy, energy efficiency 1054 2,177,243
Southern Power Company Renewable energy 546 42,500 322,474
Westar Energy Renewable energy 280 107,000 1,131,476
Total 4,833 1,589,807 15,125,255 37,967,209 21,579

Source: Issuer websites. VanEck does not confirm the accuracy of these estimates.

A Quantifiable, Positive Environmental Impact

Just this short list of bonds points to a significant environmental impact. Based on the data available, these bonds are helping to finance projects with the capacity to generate a total of over 4,800 megawatts of renewable energy, equivalent to the amount needed to power approximately 1.6 million households per year. An estimated 15.1 million metric tons of carbon emissions will be reduced or avoided annually as these projects help with the transition to clean sources of power. These positive environmental benefits are being generated by only a small portion of the bonds in the Index, which includes green bonds issued globally by many types of issuers, including supranationals, sovereigns, and other types of government related issuers.

The green bond market, as measured by the S&P Green Bond Select Index, resembles a high quality, core global bond allocation. As the growth of the market progresses, we expect green bonds to make up an increasingly large share of the overall global debt market, and consequently, within investors' core fixed income portfolios.

You can access the green bond market through the VanEck Vectors® Green Bond ETF (GRNB) , which seeks to track the S&P Green Bond Select Index.

Click here to view current Fund holdings

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Municipal Defaults, While Rare, Do Occur https://www.vaneck.com/blogs/muni-nation/municipal-defaults-while-rare-do-occur/ Jim Colby, Portfolio Manager, takes a look into the causes and effects of municipal bond defaults.

 

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VanEck Blog 4/25/2017 12:00:00 AM

One of the biggest selling points for municipal bonds, and one of their most frequently cited attributes, is their very low default rate. But while default rates in munis are very, very low, they are not zero. Defaults do happen in the municipal market from time to time—one need look no further than recent headlines to see that this is so.

Headline-Grabbing Examples

In the summer of 2016, Puerto Rico defaulted on constitutionally guaranteed general obligation bonds, the first such default by an American state or commonwealth since the Great Depression.1 Since then, a federal oversight board has been working with Ricardo Rosello, governor of Puerto Rico, to reach a plan that will allow the island commonwealth to begin what could possibly be the largest ever restructuring of debt in the U.S. municipal bond market of some, if not all, of Puerto Rico's $70 billion debt.2

In 2013, Detroit became the largest U.S. city to ever file for bankruptcy.3 During Detroit's bankruptcy proceedings, financing local pensions took precedence over repaying bondholders, many of whom were required to receive less than they were owed (these bonds were, however, covered by bond insurance).4

Default Rates

Muni bonds, in general, are second only to U.S. Treasuries in terms of perceived safety. Headline-grabbing though the above cases may be, municipal bond defaults remain extremely rare. In the period from 1970 through the end of 2015, out of the thousands of muni bonds issued across the country, there were just 99 defaults. That translates into an annual default rate of 0.09% for all-rated municipal bonds throughout the 46-year period.5 In fact, investment grade "Aaa" and "Aa" rated munis experienced zero defaults.

Of those 99 defaults, housing accounted for 45.5%, which translates into an annual default rate of 0.089% for all-rated municipal bonds throughout the 46-year period.5 These housing defaults were, in large part, attributable to one of the most popular financing methods a locality might have at its disposal: tax increment financing districts (TIFs). TIFs are largely dependent on rising tax revenues to finance land development projects, for example housing communities.6 As tax revenues rise with higher land values, the additional funds can be used to pay off the bonds that financed the project. The trouble is land values and tax revenues don't always rise as planned. TIFs were put under tremendous strain in 2007 and 2008 as the housing bubble popped and land values fell.

Hospitals and healthcare were the second-most common source of default in muni bonds from 1970 through 2015, accounting for 23.2% of all defaults, for an annual default rate for all ratings of municipal bonds of 0.088% throughout the 46-year period.5

General Obligation (GO) bonds only experienced nine defaults throughout the same 46-year period, for a very low annual default rate of 0.003%.5 Within that context, it's worth taking a closer look at what, if anything, could contribute to elevated defaults in GO bonds in the coming years. One of the most likely candidates that could potentially cause trouble for GO munis going forward is pension reform.

Defaults by Sector 1970-2015  

Purpose Number of Defaults Percentage Annual Default Rate
for all Ratings
Housing 45 45.5% 0.089%
Hospitals & Health Service Providers 23 23.2% 0.088%
Infrastructure 9 9.1% 0.009%
Education 5 5.1% 0.012%
Cities 4 4.0% 0.017%
Counties 3 3.0% 0.024%
Special Districts 0 0.0% 0.000%
State Governments 1 1.0% 0.013%
Pool Financings 0 0.0% 0.000%
Other 0 0.0% 0.000%
Non-General Obligation 90 90.0% 0.034%
General Obligation 9 9.1% 0.003%
Total 99 100.0% 0.016%

Source: Moody's Investors Service.

Outlook

Although many states have underfunded pension systems, thanks in part to tighter budgets and modest annual returns on investments,7 perhaps no state is more emblematic of the coming reckoning in pensions and municipal bonds than Illinois. This state has one of the most chronically underfunded pension systems in the country. As of 2015 Illinois' state pension debt had reached a record $111 billion, growing by $20 million per day as the state budget remained at an impasse.8 In a further illustration of the trend, Chicago, the state's largest city, recently had its credit rating downgraded to a notch above speculative status by Moody's, thanks to its ongoing underfunded pension system.9 As of April 10, 2017, the state's budgetary problems remained unresolved.

Illinois and Chicago, while extreme examples, are hardly exceptions. Kentucky and New Jersey's pension systems remain severely underfunded as well.10 Much like Chicago, Dallas's credit rating was downgraded in early 2017 by S&P over fears that its pension system continues to be underfunded. There is a distinct possibility that lawmakers may pass bills preventing states from "kicking the can" when it comes to unsustainable pension obligations, and this could potentially put stress on municipal bonds, including GO bonds.

All-in-all, although muni bond defaults remain very low, it's worth acquainting oneself with the contributing factors that can lead to a default, as well as the potential changes in today's landscape that may affect issuers' creditworthiness down the road.

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Emerging Markets on the Move https://www.vaneck.com/blogs/emerging-markets-equity/on-the-move/ In 1Q 2017, emerging markets equities resumed their outperformance “spell” over global equity markets, shrugging off the disruption caused by the U.S. presidential election.

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VanEck Blog 4/21/2017 12:00:00 AM

At the end of 2016, we commented that we were entering 2017 with a significant number of risks, both positive and negative. We came to the conclusion that on balance we viewed the global macro environment favorably, while identifying the specific risks of a stronger U.S. dollar, higher interest rates, and the further evolution of protectionist and nationalistic trade policies as some of the major negatives to monitor.

As we reflect on the first quarter of 2017, most, if not all, of these presumed deleterious factors have receded. The U.S. dollar has declined. The Federal Reserve has hiked rates, and this was almost unanimously expected. The more febrile fears of fresh trade sanctions have faded for now. Meanwhile, the solid underpinning of improved global economic momentum, which is especially helpful to the emerging markets asset class, has continued.

Emerging Markets Equities Resume Outperformance Trend

In the first quarter of 2017, the emerging markets equities asset class resumed its outperformance "spell" over global equities markets. This run of outperformance began a year ago and accelerated in the summer of 2016, but then was interrupted abruptly last November following the unexpected result of the U.S. presidential election.

It is interesting to note that 2017 so far looks to be demonstrating a style rotation. We wrote last quarter that we thought that we were close to the end of the brief but sharp period of outperformance of the heavily cyclical part of emerging markets. We thought then, and continue to believe, that the environment this year will be much more conducive to our emerging markets equity investment philosophy, which emphasizes high-quality growth over lower-quality, large-cap cyclicals.

A Style Rotation that Favors High-Quality Growth and Smaller-Cap

With one quarter completed, the evidence appears to support our style rotation contention with a much more balanced pattern of performance within the asset class. Growth stocks (MSCI EM Growth) outperformed value stocks (MSCI EM Value) by 274 basis points in 1Q 2017, while small-capitalization stocks led large caps by 144 basis points. On a sector level, the energy sector, a top performer in 2016, paused during the first quarter of 2017 and ended March at the bottom of the list. The information technology, industrials, and consumer sectors, on the other hand, performed best. Argentina, the sole representative of Latin America in the top performing countries, led country performers, followed by Poland and India. China performed in line with the overall asset class, while Russia performed worst.

1Q'17 Emerging Markets Equity Strategy Review and Positioning

Our emerging markets equity strategy is driven by bottom-up stock selection. This past quarter, we found it particularly hard to make generalizations about country weightings, and were able to find good opportunities in several countries without any one geography standing out.

The strategy's strong stock selection in the consumer discretionary sector and its lack of exposure to the energy sector helped relative performance the most, while stock selection in the industrials and consumer staples sectors disappointed the most. On a country level, selection in China, Russia, and Brazil added most value on a relative basis during the quarter, helped by good performance from Internet companies in China and Russia, and strong performance from most of our Brazilian stocks. Stock selection in Turkey, which is currently highly politically charged, and the strategy's under allocation to Korean companies, disappointed on a relative basis.

Our biases by sector, driven by our philosophy, remain. We typically have very limited exposure to energy and materials, due to their cyclical characteristics. We tend to be "underweight" in telecoms and utilities due to unattractive growth rates. On the other hand, areas like consumption, healthcare, and specialized financials are natural places for us to find opportunities, if valuations make sense.

Top Strategy Performers Hail from China and India

Top performing companies in 1Q'17 came from China and India. As a group, our main investments in Chinese companies in the Internet sector performed well, including Tencent Holdings, Alibaba Group, and JD.com. All three reported strong operations and very visible growth. TAL Education Group provides K-12 after school education programs in China and also performed well, reporting strong numbers, leveraging the demand for educational achievement with innovative delivery models. In India, our banking sector exposure, Yes Bank Limited and HDFC Bank Limited, did well, in part as a result of a more realistic appraisal of the effects of the aforementioned "demonetization".

The strategy's bottom performers came from a variety of countries. Kenya's dominant mobile telecoms operator, Safaricom, struggled given concerns about Safaricom's dominance, with some advocating a split up. Korean-based Soulbrain, a Samsung supplier of specialty semiconductor chemicals, was hurt by market fears and lumpy revenue recognition. Wizz Air Holdings, a leading low-cost airline company in Eastern Europe, was impacted by higher jet fuel prices despite good operational numbers. South Africa's Rhodes Food Group Holdings was challenged by the strength of the South African rand. Finally, waste water treatment company Beijing OriginWater Technology was a poor performer, but we remain confident that its numbers should improve as the year progresses.

Improved Earnings Reflect Firm Underpinning of Better Economic Growth

Most importantly for the asset class, we are pleased to see vindication of our stance on improved earnings for emerging markets corporates. Over the last few years corporations have failed to deliver meaningful earnings growth, both in absolute terms and relative to expectations. From the interim reporting period last year, we had been "banging the drum" on signs of a substantively improved earnings outcome. As we move through the tail end of annual reporting, we are pleased to report that earnings have been satisfactory, and even more than satisfactory for the companies that fall into our structural growth philosophy. It is not just a mark-to-market for cyclical, often commodity based, value stocks, but rather a more broad based, more efficient reflection of a firm underpinning of better economic growth.

Upward Revision to 12-Month Forward Earnings Estimates for Emerging Markets
2010 – 2017

Upward Revision to 12-Month Forward Earnings Estimates for Emerging Markets Chart

Source: BAML, HSBC, Data as of March 2017. Past performance is not indicative of future results.

The actionable agenda of the new Trump administration remains fairly uncertain. Thankfully the prospect of unilateral, harmful moves to increase trade barriers and tariffs seems to have receded recently. Whether this is due more to political realities or a more sober reflection on the cost certainly can be debated, but it is to be welcomed.

Rising Interest Rates are Generally Good for Emerging Markets

A word on rates: Rising short-term rates in the U.S. are typically an indicator of better growth and, in our view, should not be feared. As emerging markets are generally operationally leveraged, meaning that they have a higher capital stock to revenue ratio, a stronger nominal growth environment is generally positive compared to a disinflationary one. Listed emerging markets companies may be operationally geared, but are certainly not financially leveraged compared to their developed markets brethren. In fact, it is useful to note that as capex declines rapidly in many emerging markets, and revenue pick up, free cash flow is increasingly very positive, and that in the context of "arguably" under-geared balance sheets. The prospects of a more substantive return of capital to shareholders has rarely looked brighter.

China

With China, no news is good news. While we have never sought to downplay the challenges that exist in China as the economy evolves, we stick to our view, expressed frequently, that there was very little danger of some kind of imminent implosion in the financial system and/or the currency, as espoused by many "talking heads". China's economy is actually doing very nicely. The variable timing of the Lunar New Year celebrations can complicate economic analysis, but as the dust settles, it is appears that growth is fine, and that capital outflow pressure is less. Nominal growth has substantially improved, leading to strong profitability in the industrial sector. We tend to invest in areas of the corporate landscape which are loosely called the "New China" — healthcare, education, Internet, for example. And in those areas growth simply remains strong.

India

For India, the fourth quarter of 2016 was challenging as investors came to grips with some significant government moves, including "demonetization". This is the process whereby certain local currency notes (1,000 rupees and 500 rupees) were invalidated overnight to be replaced with new notes. We said that we were taking advantage of the temporary dislocations to increase investment. We did so, and it bore fruit, as India was one of the better performing markets in the first quarter of 2017.

Mexico

Mexican equities and the currency were clearly weighed down by that country's position as one of the main potential victims of a harsher trade environment. Again we took the view that market sentiment was overwrought, and our enhanced weighting in that country stood us in good stead in the first quarter, as it, too, has performed very well in 2017, particularly in U.S. dollar adjusted terms.

Brazil

Turning to last year's strongest country performers, Brazil's outlook improved post-impeachment but we continue to believe that, in general, the equity market is fully discounting that improvement. However, there remains some very significant work to be done in terms of the social security and pension systems. In the meantime real activity indicators are sluggish, to say the least.

Russia

Another of last year's winners, Russia, had a difficult first quarter of 2017. As the so-called reflation trade has deflated and crude prices retreated, Russia has suffered. Economic management has been positive, but the country's stocks remain fairly strongly correlated to the price of commodities, with a significant overlay of geopolitical risk.

Download Commentary PDF with Fund specific information and performance.
For a complete listing of the holdings in VanEck Emerging Markets Fund (GBFAX) as of 3/31/17, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

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Defining Emerging Markets Local Currency Exposure is Critical to Understanding Performance https://www.vaneck.com/blogs/emerging-markets-bonds/local-currency-exposure/ VanEck Blog 4/21/2017 12:00:00 AM

The 3% return of emerging markets currencies in 1Q 2017 and some recent headlines about whether or not the move is sustainable raise some interesting issues for investors to consider. Below are several thoughts to help investors better understand emerging markets currency exposure and returns.

Low Overlap between Debt and Equity Exposures

Investors might consider that the J.P. Morgan GBI-EM Global Core Index has very low currency exposure overlap with the most popular emerging markets equity benchmark, the MSCI Emerging Markets Index, which results in significant performance differences.

Emerging markets debt investors have suffered much more from their EMFX exposure (emerging markets currencies) since the 2008-2009 global financial crisis and over the past several years. Since the financial crisis, in fact, "EM debt currencies" have underperformed "equity currencies" by approximately 45%.

Currency Return of EM Debt versus EM Equity Indices
2007 - 2016

Currency Return of EM Debt vs. EM Equity Indices Chart

Source: J.P. Morgan and Bloomberg. EM Debt FX represented by the return attributable to foreign currency of the J.P. Morgan GBI-EM Core Index. EM Equity FX represented by the MSCI Emerging Markets Currency Index. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Why the divergence? The rules for inclusion in the emerging markets debt index demand a degree of liberalization of a country's currency that equity indices do not. Additionally, the leading emerging markets debt indexer does not consider Hong Kong, Taiwan, and Korea to be emerging markets. As a result, emerging markets debt investors have more exposure to countries with commodity dependency and who currently have flexible currency regimes. In fact, there is only a 33% overlap in currency exposure between these emerging markets debt and equity indices.

The table below lists the currency differences between the indices by region, as of March 31, 2017. The debt index shows a significantly higher weighting in Latin America (26% more) and far less exposure to Asia (39% less), which also happens to be lower yielding.

Index Weight (%) Chart

Source: J.P. Morgan and FactSet.

EMFX Up 3% YTD, After a Nearly Flat 2016

EM debt local currencies enjoyed one of their best quarters in nearly two years, gaining 3.05% YTD through March 31, as measured by the currency return of the J.P. Morgan GBI-EM Global Core Index. While some contend that this currency rally may be short lived given increased geopolitical uncertainty, we believe it may continue this year given the strong underlying economic fundamentals of many emerging markets.

The first quarter's upswing in local currencies contrasts to 4Q 2016 and the acute pain that immediately followed last November's U.S. presidential election, which unleashed political and monetary instability that sent many investors running. As 2017 began, however, the higher nominal and real interest rates of emerging markets, coupled with weaker currencies across the board, lured many opportunistic investors back into the market. To appreciate the recent rebound, it is worth noting that the strong performance of emerging markets local currency debt in 2016 (+9.95%) was driven primarily by carry and local bond price returns, while currency gains contributed only 0.64% of the total return.

Peso Rebound Represents Only a Small Retracement

Among the major emerging markets currencies, the Mexican peso has been the standout performer YTD 2017, recovering nearly 10% versus the U.S. dollar. With many worst case scenarios priced in at yearend – regarding trade and immigration in particular – the peso had devalued to its lowest level ever, and to a real effective exchange rate level (which reflects the value of a currency against a basket of its trade partners and is adjusted for inflation) not seen since the Mexican peso crisis of 1994. The pessimism was not completely without merit. The U.S. is Mexico's largest trade partner and represents a significant portion of GDP (approximately 25% of Mexican goods exports1). But Mexico's central bank took action and stepped up its pace of rate hikes, with 225 basis points of rate increases over the past six months. Mexico's policy rate stood at 6.50% at the end of March, and though it is likely to creep higher from here while inflation remains above target, real interest rates have already become an attractive component of the Mexican debt investment thesis.

Mexican Peso Real Effective Exchange Rate
January 1995 – January 2017

Mexican Peso Real Effective Exchange Rate Chart

Source: J.P. Morgan. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

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Improved Global Economy Sustains Early Rebound https://www.vaneck.com/blogs/natural-resources/improved-global-economy/ VanEck Blog 4/20/2017 12:00:00 AM

1Q 2017 Hard Assets Equities Strategy Review

During the quarter, VanEck's hard assets strategy returned -3.50% (measured by VanEck Global Hard Assets Fund, Class A (GHAAX), excluding sales charge). On a relative basis, the strategy outperformed its commodity equities-based benchmark index, the Standard & Poor's® (S&P) North American Natural Resources Sector Index (SPGINRTR),1 which returned -4.25% in the first quarter.

The better news is that for 12-month trailing performance as of 3/31/17 was very robust, with the hard assets investment strategy posting a 24.27% gain and besting its benchmark which returned 17.93%. Click here for details on performance.

The largest contributions to positive performance came from, collectively, positions in Diversified Metals & Mining, where companies capitalized on robust emerging markets demand and continued to benefit from a tightening in supply for a number of underlying metals. The largest detractors from overall performance on the quarter were Oil & Gas Exploration & Production Companies which suffered from, in general, a period of meaningful profit taking after a strong year of performance and a decline in the price of oil.

Market Review

In the early stages of a cyclical rebound from a deep downturn, it is not surprising to see, as we did this past quarter, mixed performance among the industry's sub-sectors (the movement from an inflection point into a rebound is not always linear). Still, we believe that the three pillars of the next commodity bull market (technical, macroeconomic, and fundamental) are firmly anchored in place.

Technical: Cyclically, we are still in the early stages of a rebound from one of the deepest downturns that we have seen in the history of the natural resources industry.

Macroeconomic: We continue to see a tilt in sentiment on the global economy from pervasive negativity towards cautious optimism. In fact, we may be experiencing an inflection in global economic factors. For example, China's economy appears to be improving, India has demonetized, Brazil's economy also appears to be on the mend, and there are positive signs of growth in Mexico.

% of Global Purchasing Manager Indices ("PMIs") in Expansion Territory

Global Purchasing Manger Indices Chart 1

Source: Haver Analytics; Bloomberg; Renaissance Macro Research.
Data as of March 31, 2017. Not intended to be a forecast of future events or a guarantee of future results or investment advice.

Fundamental: The corporate restructuring that has been taking place over the past two-and-a-half years (a significant part of which involved deep cuts in capital expenditure) has essentially drawn to a close. As a consequence, we are now seeing supply tightness in many of the commodities in which we are involved and a slight shift toward growth initiatives driven by an increase in investment expenditures. With the best balance sheets and cost structures they have seen in generations, many companies are now generating, on a relative basis, a great deal of cash.

Natural Resources Sub-Sector Review

Energy: The crude oil market just started to rebalance at the end of the quarter. We expect this to continue throughout the second quarter as refineries come out of maintenance (and start to draw down crude) and there is an uptick in global gasoline demand. While there was some skepticism about OPEC's ability to maintain its announced reduced levels of production, they have been maintained, and may even be extended.

Gold: After a disappointing close to 2016, the gold market has regained momentum during the first quarter of 2017. Concerns over the current geopolitical environment, particularly regarding the new administration's ability to implement pro-growth initiatives in the U.S., have been some of the primary drivers of gold and gold equities thus far this year.

Diversified Metals & Mining: Mining companies capitalized on robust emerging markets demand during the quarter. In addition, the copper market saw supply disruptions and the zinc market experienced tightening supply. With demand also solid in both China and the U.S., we are seeing steady global demand for commodities catching up, or balancing, with limited supply growth.

Top Quarterly Contributors/Detractors

In the first quarter, the top contributing companies continued to see positive results from restructuring initiatives and strong commodity prices while the detractors were primarily impacted by asset flows and the decline in oil price.

Top Contributors/Detractors

Source: FactSet; VanEck. Data as of March 31, 2017.
Weights denoted with "0.0%" indicate a position sold during the quarter. Contribution figures are gross of fees, non-transaction based and therefore estimates only. Figures may not correspond with published performance information based on NAV per share. Past performance is not indicative of future results. Portfolio holdings may changes over time. These are not recommendations to buy or sell any security.

Outlook: Still Bouncing Back from Historic Downturn

At the close of this first quarter of 2017, we believe that it is vitally important to remember that we are still only roughly a year into the recovery from one of the most historic downturns ever experienced in the natural resources industry.

This rebound continues to be fueled by the relentless increase in global consumption for most commodities and the never-ending struggle on supply to satisfy this demand. Certainly, the draconian capital expenditure cuts of the last several years have impacted global output. However, the real benefit from industry-wide and corporate restructuring activities has been that many companies have optimized operations, increased productivity, and dramatically improved profitability. In turn, this has resulted in higher quality, lower risk investment opportunities. While this phenomenon is not being universally realized by all corporations or recognized by all market participants (and, thus, does not guarantee a smooth increase in shareholder value), we believe the long-term, secular nature of these changes will ultimately generate attractive returns.

Investment in Commodities Can Address Rising Inflation Concerns

Despite this improving fundamental outlook for commodities and natural resources equities, by far the most pressing issue among the clients and investors we have visited with over the past several months is the emergence of inflation and the search for the optimal strategies to help mitigate this risk. While inflation has not been an overly impactful aspect of the global economy for some time, commodities and natural resources equities have historically exhibited a strong link to inflation, performing well in both rising interest rate environments and during periods of higher-than-average growth in general consumer prices levels. In the past, and under most circumstances, when inflation has risen above 2% — the current target of many central banks — commodities and natural resources equities have been an attractive investment alternative.

Commodities and Natural Resources Equities vs. Rising Rates
1969-2015

Commodities Natural Resources Equities vs Rising Rates Chart 3

Source: VanEck; Bloomberg. Data as of February 2017. Charts are for illustrative purposes only. Past performance does not guarantee future results.

Consumer Price Index (CPI) vs. Commodity Prices

CPI vs Commodity Prices Chart 4

Source: Federal Reserve Bank of St. Louis. Data as of February 2017. Charts are for illustrative purposes only. Past performance does not guarantee future results.

We Favor Investment Ideas that Deliver Long-Term Structural Growth

One of the main principles of our investment philosophy continues to be to look for investment ideas that can deliver long-term structural growth and an eventual increase in intrinsic value. Since we remain convinced that positioning our portfolios for the future, and not just reacting to current circumstance, is of paramount importance, our focus across the sectors in which we invest remains on companies that can navigate commodity price volatility, inflation risks, and the intrinsic volatility of the markets to help grow sustainable shareholder value.

Download Commentary PDF with Fund specific information and performance. For a complete listing of the holdings and performance, please visit VanEck Global Hard Assets Fund (GHAAX).

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Don't Fight the Tape https://www.vaneck.com/blogs/allocation/dont-fight-the-tape/ VanEck Blog 4/18/2017 12:00:00 AM

VanEck NDR Managed Allocation Fund

VanEck NDR Managed Allocation Fund (NDRMX) tactically adjusts its asset class exposures each month across global stocks, U.S. fixed income, and cash. It utilizes an objective, data-driven process driven by macroeconomic, fundamental, and technical indicators developed by Ned Davis Research ("NDR"). The Fund invests based on the weight-of-the-evidence of its objective indicators, removing human emotion and decision making from the investment process. The expanded PDF version of this commentary can be downloaded here.

Fund Positioning April 2017

Going into April, VanEck NDR Managed Allocation Fund's (NDRMX) asset class positioning did not change materially. The Fund maintained its 81% allocation to stocks and 18.5% allocation to bonds. Regional equity positioning shifted to favor Pacific ex Japan, the U.K., and the U.S. The Fund's exposure to Europe ex U.K. was reduced and its position in Japan was removed. Within the U.S., the Fund now has less exposure to value and more exposure to growth.

Fund Positioning April 2017 Pie Charts

Source: VanEck. Data as of April 4, 2017.

March 2017 Performance Review

All eyes were on the U.S. Federal Reserve and Washington in March. The Fed increased interest rates from 0.75% to 1.00% and did not change its forecast for future rate hikes. In Washington, the Republicans pulled the American Health Care Act of 2017 before it could be voted on. The political focus is now on President Trump's ability to successfully implement his plans to cut taxes and invest in infrastructure.

VanEck NDR Managed Allocation Fund's (NDRMX) performed very well in March, returning 1.31% versus 0.75% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index). The largest contributors to performance were the Fund's asset class and regional equity positioning. The Fund was overweight global stocks and underweight bonds, which was the right decision as global stocks outperformed bonds. The regional equity overweight positions in Europe ex U.K. and Pacific ex Japan were also significant contributors to performance. Both of these regions meaningfully outperformed the other equity regions. The largest detractors from performance were the regional equity overweight to the U.S. and the underweight position to the Emerging Markets. Cap and style positioning within the U.S. also detracted from performance due to the Fund's value over growth positioning.

On a since inception (5/11/16) basis, the Fund continues to outperform its benchmark with a return of 9.85% return versus 8.59%.

Total Returns (%) as of March 31, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.31 9.85
Class A: Maximum 5.75% load -4.51 3.55
60% MSCI ACWI/
40% BbgBarc US Agg.1
0.75 8.59

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at net asset value (NAV). Index returns assume that dividends of the Index constituents in the Index have been reinvested.

Returns less than a year are not annualized.

Expenses: Class A: Gross 3.60%; Net 1.38%.
Expenses are capped contractually until 05/01/18 at 1.15% for Class A. Caps exclude certain expenses, such as interest.

Weight-of-the-Evidence: Indicators Continue to be Bullish on Global Stocks Over Bonds

The S&P 500® Index is now up 11.83% since the U.S. presidential election (period of 11/08/16 to 3/31/17). We are positioned for stocks to continue to rise even further based predominantly on a strong technical composite reading. "Don't fight the tape" is Ned Davis's first rule of investing; they explain this as "the trend is your friend, go with the Mo (Momentum that is)." We intend to ride the market higher until the weight-of-the-evidence determines that the rally is over. The evidence below supports this positioning.

This chart shows the aggregate reading of the technical indicators that determine the allocation between stocks and bonds. Four of the five technical indicators are bullish; momentum, breadth, mean reversion, and seasonality. The only bearish technical signal is from an "overbought/oversold" indicator.

NDR Stock/Bond Technical Composite, 2012 to 2017

NDR Stock/Bond Technical Composite 2012 to 2017 Chart

Source: Ned Davis Research. Data as of March 31, 2017.
NDR Stock/Bond Technical Composite, 2012 to 2017. Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

The next chart shows the macroeconomic and fundamental indicator composite. This composite of indicators, with its neutral to slightly bullish reading, tempers the conviction of the technical indicators.

The global Purchasing Managers Indices (PMI), Central Bank Monetary Policy, and Global SHUT indicators are bullish. PMI and global monetary policy are classic macroeconomic indicators designed to measure the health of an economy. SHUT is an acronym for Staples, Healthcare, Utilities, and Telecom (i.e., the defensive sectors). Typically, lagging defensive sectors have signaled a healthy overall equity market and therefore, this indicator is bullish. The bearish indicators in the composite include a stock/bond relative value indicator and the DSI Global Sentiment Composite. The DSI Global Sentiment Composite measures the short-term sentiment of futures traders in various global markets.

NDR Stock/Bond Macroeconomic/Fundamental Indicator, 2012 to 2017

NDR Stock/Bond Macroeconomic/Fundamental Indicator Chart

Source: Ned Davis Research. Data as of March 31, 2017.
Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

The weight-of-the-evidence, therefore, continues to support a significant overweight to global stocks over bonds.

NDR Stock/Bond Composite Indicator, 2012 to 2017

NDR Stock/Bond Composite Indicator 2012 to 2017 Chart

Source: Ned Davis Research. Data as of March 31, 2017.
Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

Additional Resources

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International Moats Impress https://www.vaneck.com/blogs/moat-investing/international-moats-impress/ International moats reward investors in March, while U.S. moats remain tepid amid political and economic uncertainty.

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VanEck Blog 4/12/2017 12:50:05 PM

For the Month Ending March 31, 2017

Performance Overview: International Moat Investors Rewarded

March rewarded international moat investors on both an absolute and a relative basis. International moat stocks rose 3.33% last month, as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), outpacing the benchmark MSCI All Country World Index ex USA (ACWI ex-USA) which gained 2.54%. March's strong performance helped extend the YTD outperformance of the International Moat Index versus the ACWI ex-USA to more than 300 basis points (11.07% versus 7.86%).

In terms of regional contributions, Australian firms and Hong Kong listed companies overall were the primary drivers of the International Moat Index's positive performance; both regions accounted for a roughly 20% average Index weighting for the month. The Index's top performing individual company was ENN Energy Holdings Ltd. (2688 HK, +16.53%), a privately owned natural gas utility company in China. Consumer discretionary stocks including MGM China Holdings Ltd. (2282 HK, +14.44%) and German industrials firm Kion Group AG (KGX GR, +11.93%) were also among the Index's top performers. Although few International Moat Index stocks posted negative results in March, Dongfeng Motor Group Co., Ltd. (489 HK, -5.32%) led the pack of bottom performers despite its strong start in 2017.

U.S. Moats: Beware the Ides of March

For investors in U.S. moats, March results were tepid reflecting both political and economic uncertainty. The stock market euphoria that followed President Trump's election continued to dissipate, and his administration suffered two major strikes: courts blocked new travel restrictions and the House rejected the Republican's healthcare reform. Sentiment may be shifting somewhat negative on Trump's ability to implement his pro-growth agenda. The Federal Reserve struck yet another blow for U.S. stocks with its 0.25% rate increase on March 15. For March, the U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") trailed the S&P 500® Index (-0.26% vs. 0.12%), but maintained its outperformance year-to-date (8.00% vs. 6.07%).

U.S. consumer discretionary companies such as Lowe's Companies, Inc. (LOW US, +10.54%) and Harley-Davidson, Inc. (HOG US, +10.41%) were the top two performers for the U.S. Moat Index. However, negative performers dominated, including poor showings by several healthcare and industrials firms. Biotech companies Amgen, Inc. (AMGN US, -7.06%) and Biogen, Inc. (BIIB US, -5.26%) struggled along with aerospace supplier, TransDigm Group, Inc. (TDG US, -13.39%).

Index Review Results

Both Indices implemented their standard quarterly review after the close of markets on March 17, 2017. In accordance with their staggered rebalance methodology, one of the two sub-portfolios in each Index were reviewed and rebalanced at this time.

The International Moat Index had 25 companies added and removed from the sub-portfolio under review. Eleven of the 25 companies were brand new additions, and 18 of the 25 companies left the Index completely. There are now 72 companies in the International Moat Index. The Index's allocation to financials companies was reduced, healthcare was increased, and Australia exposure dropped by roughly 5% while Japan exposure nearly doubled.

U.S. Moat Index turnover was lower. Nine companies were swapped in the sub-portfolio under review. Of these nine, seven had previously been removed from the Index's other sub-portfolio and therefore were removed from the index entirely. L Brands, Inc. (LB US), Yum! Brands, Inc. (YUM US), Yum China Holdings, Inc. (YUMC US), and Quintiles IMS Holdings, Inc. (Q US) were the new entrants to the Index of the nine added to the sub-portfolio under review. The U.S. Moat Index now contains 47 constituents.

See below for full results.

(%) Month Ending 3/31/17

Domestic Equity Markets

International Equity Markets

(%) As of 3/31/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 3/31/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
Lowe's Companies, Inc.
LOW US
10.54
Harley-Davidson, Inc.
HOG US
10.41
Twenty-First Century Fox, Inc. Class A
FOXA US
8.89
Varian Medical Systems, Inc.
VAR US
8.63
Cerner Corporation
CERN US 6.92

Bottom 5 Index Performers
Constituent Ticker Total Return
Express Scripts Holding Company
ESRX US
-6.71
Amgen Inc.
AMGN US
-7.06
L Brands, Inc.
LB US
-7.97
Compass Minerals International, Inc.
CMP US
-10.49
TransDigm Group Incorporated
TDG US
-13.39

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
ENN Energy Holdings Limited 2688 HK 16.53
MGM China Holdings Limited 2282 HK 14.44
KION GROUP AG KGX GR 11.93
Iluka Resources Limited ILU AU 11.51
Grupo Aeroportuario del Centro Norte SAB de CV Class B OMAB MM 11.44

Bottom 5 Index Performers
Constituent Ticker Total Return
China Construction Bank Corporation Class H 939 HK -2.30
Blackmores Limited BKL AU -2.47
Vicinity Centres VCX AU -2.84
Vocus Group Limited VOC AU -3.41
Dongfeng Motor Group Co., Ltd. Class H 489 HK -5.32

View MOTI's current constituents

As of 3/17/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
L Brands Inc LB US
CVS Health Corporation CVS US
Yum China Holdings Inc YUMC US
TransDigm Group TDG US
Guidewire Software GWRE US
Cerner Corp CERN US
Quintiles IMS Holdings, Inc. Q US
Yum! Brands Inc YUM US
Zimmer Biomet Holdings Inc ZBH US

Index Deletions
Deleted Constituent Ticker
Berkshire Hathaway B BRK.B US
American Express Co AXP US
US Bancorp USB US
CSX Corporation CSX US
Deere & Co DE US
Norfolk Southern Corp NSC US
Harley-Davidson Inc HOG US
Tiffany & Co TIF US
Time Warner Inc TWX 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
Sina Corp (Caymans) China
KION Group AG Germany
Cemex SA CPO Mexico
Telefonica SA Spain
Ramsay Health Care Ltd Australia
KDDI Corp Japan
Sanofi-Aventis France
Shire Plc United Kingdom
Tata Motors Ltd India
China Mobile Ltd. China
Rakuten Inc Japan
Baytex Energy Corp. Canada
KBC Group NV Belgium
Nidec Corp Japan
DBS Group Holdings Singapore
Bayer AG Germany
Novartis AG Reg Switzerland
ENN Energy Holdings Ltd China
GlaxoSmithKline United Kingdom
Kao Corp Japan
Nippon Tel & Tel Corp Japan
Meggitt United Kingdom
Sonic Healthcare Ltd Australia
Potash Corp of Saskatchewan Canada
Ambev S.A. Brazil

Index Deletions
Deleted Constituent Country
Bank of Montreal Canada
Canadian Imperial Bank of Commerce Canada
National Bank of Canada Canada
National Australia Bank Ltd Australia
Westpac Banking Corp Australia
Commonwealth Bank Australia Australia
Computershare Ltd Australia
Vocus Group Limited Australia
Blackmores Ltd Australia
Woolworths Ltd Australia
CSL Ltd Australia
London Stock Exchange Plc United Kingdom
China Telecom Corporation Ltd. China
China State Construction International
Holdings Ltd.
China
Orange France
Schneider Electric SE France
Kering France
Mobile TeleSystems PJSC Russian Federation
Infosys Ltd India
Seven & I Holdings Co Ltd Japan
Grifols SA Spain
Symrise AG Germany
Alfa Laval AB Sweden
Galaxy Entertainment Group Ltd. Hong Kong
Wynn Macau Hong Kong

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



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Weakness to Rally: Gold Follows Rate Hike Pattern https://www.vaneck.com/blogs/gold-and-precious-metals/gold-follows-rate-hike-pattern/ Gold weakened ahead of the Fed’s March 15 rate hike, but after the 0.25% hike, gold rallied for a slight gain to end March at $1,249.35.

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VanEck Blog 4/10/2017 11:19:47 AM

Rate Increase and Political Uncertainty in U.S. are Primary Drivers in March

Expectations around the Federal Reserve's (Fed) March 15 rate announcement were the principal drivers of the gold market in March. U.S. economic statistics have been somewhat positive recently, leading the market to expect the Fed to become more hawkish and to perhaps even guide for four rate increases in 2017 (one more than the Fed had announced in December). As a result, gold was weak ahead of the Fed's rate decision, falling roughly $50 over two weeks to the $1,200 per ounce level. On March 15 when the Fed implemented its first 2017 rate hike as expected, it maintained its projection of only two more rate increases this year. Economic guidance also remained unchanged and Chair Janet Yellen said the Fed is willing to tolerate temporary inflation in order to overshoot its two percent target. The $1,200 per ounce gold price level held on the dovish Fed announcements and gold rallied to end the month with a small gain closing March at $1,249.35 per ounce.

Political activity in the U.S. was also supportive of gold. As we had expected, the market euphoria surrounding the November U.S. presidential election continues to dissipate. The Trump administration has suffered two strikes: the courts are blocking the implementation of new travel restrictions, and the House has blocked healthcare reform. In our opinion, these early defeats make it increasingly unlikely that the administration will be able to deliver on the expected pro-growth reforms that drove the market to new highs following the election. We believe one more strike could create a confidence crisis, which makes meaningful tax reform the next issue that will be vital for Trump's presidency to gain some positive momentum.

The price trend for gold stocks mimicked gold bullion in March, for the most part. Both the NYSE Arca Gold Miners Index1(GDMNTR) and the MVIS™ Junior Gold Miners Index2 (MVGDXJTR) fell ahead of the March 15 Fed announcement and gained afterwards, but, unlike the metal, both gold stock indices ended the month with small losses overall.

Gold's Before and After Rate Hike Pattern

The March 0.25% Fed rate increase was the third in this tightening cycle that began in December 2015. In all three instances, increasing pessimism in the gold market caused gold to fall to long-term or technical lows. This pessimism was caused by anticipation of rising real rates, a strong U.S. dollar, and faith in the Fed's outlook for a strengthening economy. However, the economy has not been as robust as hoped and recently, rising inflation has caused real rates to fall. The Fed rate increase in December 2015 was a major turning point, marking the end of the historic 2011 - 2015 bear market for gold. A shift in sentiment also lead to gold rallies following the December 2016 and March 2017 rate hikes. Markets were irrationally causing the U.S. dollar to become overbought and gold to be oversold before each rate increase. Three times makes a pattern and if we have learned anything in our history of investing, it's that trading patterns end once they are recognized. We will look for market sentiment, Fed behavior, or some other driver to help change the pattern when the Fed hikes rates again. The market expects the next possible rate hike at the June Federal Open Market Committee (FOMC) meeting.

The Current (More Rational) Market Bubble Could Pop on Growing Debt

The current economic expansion and bull market in stocks are among the longest on record. Such cycles do not last forever and we have commented in the past on the risks an economic downturn would bring to the financial system. While valuations for stocks and real estate are lofty, the level of mania that we had felt ahead of the tech bust (2001) or housing bubble (2008) has not materialized. Although the popularity of exchange traded funds (ETFs) and other passive investment vehicles could be seen as a form of mania, it is difficult to see anything happening in those vehicles that foreshadows a market crash. Perhaps, if there is to be a downturn, this time it will likely be more orderly than others in the recent past.

While economic downturns are not necessarily drivers for gold, since the subprime crisis of 2008-2009 the financial system has been in such a precarious state that even a mild recession could be financially devastating, thus ultimately benefitting gold and gold stocks. The difference in this cycle is, firstly, that sovereign debt globally is higher than it has ever been during peacetime and it continues to grow. The Congressional Budget Office's (CBO) annual report shows the debt/GDP ratio3 has doubled since 2008 to 77% today and is forecasted to reach 150% in 2047. The CBO also forecasts debt service rising from 7% today to 21% in 2047. The budget deficit was not mentioned in President Trump's February 28 speech to Congress. We believe no politician wants to seriously tackle the debt bubble for fear of getting voted out of office for raising taxes or cutting entitlements.

Recently we have seen that it appears politically impossible to implement the necessary reforms required to avoid insolvency or a systemic failure of the public healthcare insurance system. Social Security is yet another entitlement that appears to be heading toward insolvency. Gridlock reigns, which makes a debt crisis or another calamity a prerequisite to motivate those in Washington to act constructively. Such a crisis becomes much more likely in a recessionary economy.

The Fed's three rate increases in this cycle amount to 75 basis points (0.25% on December 16, 2015; 0.25% on December 14, 2016; and 0.25% on March 15, 2017). U.S. rates remain far below historic norms and rates in other advanced economies are even lower. Quantitative easing did not work as well as planned. The Fed is holding trillions of dollars in U.S. Treasuries and mortgage-backed securities on its balance sheet and may have to resort to more radical policies to stimulate the economy in the next recession, which brings added financial risks.

Indications of a Late-Cycle Economy Are Increasing

Here are a number of signs of a late-cycle economy and market. Many of these were highlighted in recent Gluskin Sheff4 newsletters:

  • At eight years, the S&P 500® Index5 is in its second longest bull market since 1928.
  • With a 16.9% annualized gain, this is the third strongest S&P bull market since 1928.
  • Despite stock market gains, GDP growth has expanded just 1.8% annually, versus 3.4% during the longest bull market, occurring from 1987 to 2000.
  • 10 of the last 13 Fed hiking cycles ended with a recession.
  • Price to Earnings multiples are in the top quintiles historically and the most expensive since the dot-com bubble (1995-2001).
  • Margin debt is at all-time highs.
  • Auto sales and loan delinquencies suggest automotive activity has peaked.
  • A record 279 corporate insiders have sold stock so far this year.
  • Initial jobless claims are at their cycle lows, typical historically in the waning months/years of expansions.
  • Each of the seventeen Republican presidents since Ulysses S. Grant has experienced a recession within roughly two years of taking office.

Sentiment and Consumption: A Recession Precursor?

A recent Morgan Stanley report interestingly examines historical consumer confidence, as measured by the Conference Board Consumer Confidence Index,6 and personal consumption expenditures7 (PCE). The sentiment of consumers and businesses (soft data) has been trending higher, while data that tracks actual economic results (hard data) has stagnated. This chart is particularly compelling. Notice the divergence between the soft and hard data preceding the last three recessions. A similar divergence is happening now, as consumer confidence appears to have reached its highest level since the tech bust.

Divergence Between Sentiment and Consumption Precedes Recessions

Chart: Divergence Between Sentiment and Consumption Precedes Recessions

Source: Bloomberg; Federal Reserve Bank of St. Louis; U.S. Bureau of Economic Analysis. Data as of February 28. 2017.

While we hope that President Trump is able to bring tax, regulatory, and other reforms that energize the U.S. economy, political headwinds and late cycle evidence suggest it is prudent for investors to begin to hedge against the financial pain that the next recession might bring.

Download Commentary PDF with Fund specific information and performance

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The Growing Role of Emerging Markets Corporates https://www.vaneck.com/blogs/emerging-markets-bonds/growing-role-emerging-markets-corporate-bonds/ Emerging markets bonds deserve a place in fixed income investors’ portfolios.

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VanEck Blog 4/4/2017 11:38:37 AM

We believe that emerging markets (EM) bonds deserve a place in fixed income investors' portfolios. This broad category offers differentiated choices across countries, credit, currency, and maturity. Within the universe of tradable EM bonds that are accessible to foreign investors, emerging markets corporate "hard currency" bonds (predominately U.S.-dollar denominated) now dominate in sheer size and are critical in driving "EM debt" returns. In our view, these bonds are very important and cannot be ignored by emerging markets investors.

Emerging markets corporate USD bonds have evolved from one with little sponsorship, followed only by select specialists, to a US$1.28 trillion market representing nearly 41% of the total emerging markets bonds universe, as measured by the MVIS™ EM Aggregate Bond Index.1

Corporate USD Bonds Dominate the Emerging Markets Bonds Universe
Total Market Capitalization of $3,103 (US$Billions)

Corporate USD Bonds Dominate the Emerging Markets Bonds Universe Chart

Source: MV Index Solutions. March 2017. Represents the composition of the MVIS EM Aggregate Bond Index as of 2/28/2017.

Emerging Markets Corporate Bond Market Has Tripled in Size

From 2007 to 2Q 2016, emerging markets corporate debt nearly tripled in size. Corporate USD bonds now account for a greater proportion of new issuance than sovereign or government bonds. The chart below shows the relative growth of EM corporate USD bonds versus EM sovereign USD bonds (local currency bonds are not reflected).

The Growth of EM Corporate Bonds
January 2007- June 2016, US$Billions Outstanding

The Growth of EM Corporate Bonds

Source: Bank for International Settlements. Data as of June 2016. Data may differ from previous chart given alternative sources.

Beyond sheer size, there are four bottom-up factors that argue for exposure to emerging markets corporate USD bonds: (1) EM corporate bonds offer higher yields; (2) have historically offered higher returns; (3) strong credit metrics underpin EM corporate issuers; and (4) EM corporate bonds tend to default less often than both U.S. and European corporate bonds.

EM Corporate Bonds Offer Higher Yields

In addition to better credit metrics, lower default rates, and higher returns, EM corporate bonds continue to yield more than their U.S. counterparts on average even when adjusted for ratings. EM corporates yield 112 basis points and 58 basis points more than their U.S. investment grade and high yield comparables, respectively, as shown in the following chart.

Yields: Emerging Markets Corporate Bonds versus U.S. Corporate Bonds2 (%)
Yield to Worst* (as of 2/28/2017)

Yields: Emerging Markets Corporate Bonds versus U.S. Corporate Bonds Chart

* Yield to Worst measures the lowest of either yield-to-maturity or yield-to-call date on every possible call date.
Source: VanEck, Bank of America Merrill Lynch. Data as of February 2017. Past performance is no guarantee of future results.

EM Corporate Bonds Have Historically Returned More

Through yearend 2016, emerging markets corporate bonds have outperformed a blended version of high grade (JULI) and high yield U.S. corporate bonds in eight out of the past thirteen years (or 62% of the time), as measured by the JPMorgan Corporate Emerging Markets Bond Broad Index (CEMBI Broad).3 More importantly, however, the cumulative returns for emerging markets corporate bonds over that time frame were 130% versus 120% for the blended performance, or approximately 1,000 basis points higher.

Annual Returns: Emerging Markets Corporate Bonds versus Blended U.S. Corporate Bonds (%)
2004-2016

Annual Returns: Emerging Markets Corporate Bonds versus Blended U.S. Corporate Bonds Chart

Bold indicates outperformance. Source: JP Morgan "CEMBI Monitor" January 2017. Past performance is no guarantee of future results.

EM Corporate Issuers Have Strong Credit Metrics

The credit metrics of emerging markets corporate issuers continue to be better than those of their U.S. counterparts. Indeed, whether discussing the entire universe of rated credits, or only investment grade or high yield sub-sectors, EM corporates have stronger credit metrics across the board.

And this difference is not trivial. According to data compiled by Bank of America Merrill Lynch on a gross leverage basis (as of 6/30/16), EM companies on average are 14% less levered than U.S. companies. Net leverage is even more impressive. The averages show that among rated entities, U.S. companies' net leverage is approximately 32% higher than that of EM corporates.

Understandably, within investment grade the gross leverage figure is not quite as dramatic, with EM corporates approximately 8% less levered on a gross basis. However, the net number remains impressive, for example, with Latin American credits 30% less levered than U.S. companies. More stark contrasts abound within the high yield matrix, with EM corporates 46% and 56% less levered than U.S. high yield corporates on a gross and net basis, respectively.

Cash is where emerging markets corporates really shine. The level of cash held by EM corporates collectively and by rating category is more than double that held by comparable U.S. companies. Cash-to-total debt for the universe of EM companies is 33% (according to BAML), a full one-third of total funded debt. This is an exceptional level of cash and speaks well for the liquidity of EM corporate balance sheets. It is also an important reason behind the lower default rates discussed next.

EM Corporate Bonds Default Less Often

According to statistics compiled by Standard & Poor's, since the year 2000, EM high yield corporate bonds have defaulted less than their U.S. counterparts in 15 of 17 years; in 10 of these years they defaulted less than both U.S. and European high yield bonds. (In 2002, it is worth noting that Argentina's default was a singular event that heavily impacted the entire EM category). When it comes to defaults, emerging markets corporates have outperformed their U.S. and European counterparts 88% and 59% of the time, respectively, since 2000.

Default Rates: Emerging Markets Corporate Bonds versus Developed Market Corporate Bonds
% of Total Debt Outstanding

Default Rates: Emerging Markets Corporate Bonds versus Developed Market Corporate Bonds Chart

*Prior twelve month statistics through November 2016.
Source: Standard & Poor's. Past performance is no guarantee of future results.

Attractive Opportunities for Investors

Emerging markets bonds have evolved significantly over the past 20 years, growing in size, diversity, and liquidity. Improved economic policies, financial positions, and credit profiles have helped usher in new emerging markets bonds opportunities, creating a diverse mix of sovereign and corporate bonds issued in both local and hard currencies. Emerging markets corporate USD bonds are an important part of this mix, and can potentially enhance returns (via both income and capital appreciation) and provide diversification benefits, offering attractive opportunities to investors.

VanEck gives investors access to emerging markets corporate USD bonds through actively managed mutual funds and several passive ETFs.

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Something is Rotten in the State of Illinois https://www.vaneck.com/blogs/muni-nation/rotten-in-state-of-illinois/ The state of Illinois could very well lose its investment grade rating – sooner rather than later. Learn Why.

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VanEck Blog 3/30/2017 12:00:00 AM

My apologies, Mr. Shakespeare! But it certainly seems to me that there is.

The state of Illinois could very well lose its investment grade rating, sooner rather than later. Nearly two years without a budget, unfunded pension obligations, and a backlog of bills do not presage an easy future for the state's finances.

Another Year without a Budget

Illinois may not be another Detroit. Or another Puerto Rico. But it has all the characteristics of a disaster just waiting to happen.

As midnight struck on December 31, 2016, Illinois had not had a budget for nearly two years. And its deficit was in the billions ($11 billion of unpaid bills). Now, in mid-March, little has changed: there is still no budget and the deficit deepens at the rate of $11 million a day.1 On March 28, with unpaid bills of $12,389,967,202.802 the state looks as if it could soon lose its investment grade rating.

Hopes of a "grand bargain" between Democrats and Republicans, with votes in the state's senate on tax increases, school funding reform, and other measures, evaporated on March 1, when Governor Rauner involved himself in the process and Republican support vaporized.

The standoff between the legislature (controlled by the Democrats) and Governor Rauner (a Republican) grows ever more rancorous, ever more insoluble, and a credit down grade ever more likely.

A Matter of Property Taxes

One of the most, if not the most, intractable problem remains Rauner's refusal to budge on freezing property taxes. To Rauner's thinking, freezing property taxes will lead to an increase in economic activity, induce more business formation, and, possibly, entice companies to re-locate to Illinois. Well, it hasn't happened. And the deficit has mushroomed.

Two constituencies to have been hit particularly hard are schools (particularly in Chicago) and state municipalities. In addition, both service providers and vendors remain unpaid. Matters have come to such an impasse that, on February 14, the Chicago Public Schools (the third largest public school system in the U.S.) sued the state, calling its funding "discriminatory."3

How the Mighty Have Fallen

Perhaps reflective of both its robust general obligation repayment statute and its sovereign powers over revenues and spending, the state has been able to maintain a solid credit profile. In 2016, not only was Illinois (together with its agencies and its cities) the fifth largest issuer of municipal bonds, but also, at the end of the year, only three states – California, New York, and Texas – had more municipal bonds outstanding.

U.S. State and Territory Municipal Bonds Outstanding – Top Ten
December 31, 2016

State/Territory U.S. $ Billion
California 602.2
New York 410.6
Texas 362.1
Illinois 172.7
Florida 154.5
Pennsylvania 137.7
New Jersey 127.6
Ohio 112.1
Massachusetts 110.9
Puerto Rico 101.8
Source: Bank of America Merrill Lynch

 

U.S. State and Territory Municipal Bonds Issuance in 2016 – Top Ten
December 31, 2016

State/Territory U.S. $ Billion
California 65.0
Texas 52.6
New York 44.3
Pennsylvania 20.4
Illinois 20.2
Florida 18.7
Massachusetts 15.5
Michigan 13.2
New Jersey 12.8
Ohio 11.4
Source: Bank of America Merrill Lynch

Now, however, despite its obvious economic strength, the state is currently the lowest rated in the country, with Fitch, Moody's, and Standard & Poor's rating it either BBB or Baa2. This is the lowest for a state since Massachusetts in 1992.4 (Massachusetts is now one of the higher rated states in the U.S.)

While Illinois is on negative watch at Fitch Ratings, both S&P and Moody's Investors Service have assigned it a negative outlook. Should no budget deal be struck by July 1 this year, the start of the 2018 fiscal year, the likelihood of downgrades from S&P and/or Fitch is strong. When, on February 1, Fitch downgraded $25.9 billion in outstanding general obligation bonds to 'BBB' from 'BBB+', it noted: "Fitch expects to resolve the Rating Watch within the next six months based on an assessment of the state's fiscal trajectory as it starts fiscal year 2018. If the state continues on the current path, a further downgrade would be warranted."5

Speculative Territory – Only a Couple of Notches Away

While it would take a couple of downgrade notches for Illinois' general obligation debt to become speculative, a single downgrade for its moral obligation and appropriation-based debt would take it into speculative territory. According to all three rating agencies, not in recent memory has any state's debt been rated as speculative.6

The Consequences?

Dire.

The indexes which govern the construction of the entire suite of municipal ETFs at VanEck have, as might be expected, exposure to the State of Illinois, and its political subdivisions, in proportion to the rules governing each index, as well as the issuances which come to market. Should a downgrade occur, not only will the cost of capital rise for the state, but the allocation of bonds amongst the VanEck ETFs will likely shift to the speculative part of the marketplace and possibly cause the geographic profiles to change for all ETFs.

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The Investment Case for Green Bonds https://www.vaneck.com/blogs/etfs/green-bonds-investment-case/ Beyond the desire to have a positive impact, there is a sound investment rationale for holding green bonds in an investor’s portfolio.

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VanEck Blog 3/24/2017 9:53:06 AM

Green bonds allow fixed income investors to both fulfill their investment objectives and make a positive impact on the environment. With pricing levels between green and conventional bonds generally very close and highly correlated, the investment case for holding green bonds begins with the impetus for holding any fixed income investment: primarily, income and relative safety versus other portfolio holdings.

Given the market's significant growth in the past five years, green bonds are attracting interest not only from environmental, social, and governance (ESG) focused investors but from traditional fixed income investors who previously did not have an efficient way to "green" their portfolios.

What are green bonds?

Green bonds, in short, are simply conventional bonds with an environmentally friendly use of proceeds. Today, the overall market resembles a core global fixed income benchmark, with similar yield, duration and credit quality. Investors can, therefore, allocate a portion of their global bond allocation to green bonds without significantly altering the risk and return profile of their portfolio. In other words, bond investors can structure a more environmentally aware portfolio without having to compromise on their investment goals.

Apple issued a $1.5 billion green bond in February 2016, the largest issued by a U.S. corporation to date

Proceeds from Apple's green bond have so far been used to finance 16 projects across a variety of categories including renewable energy, green buildings, energy efficiency, and recycling/material recovery. Apple estimates that these projects will divert 6,670 metric tons of waste from landfills, generate 331mm kWh of renewable energy per year, and reduce greenhouse gas emissions by 191,500 metric tons per year. The bond was issued to build momentum ahead of the 2015 Paris Agreement where several governments pledged to reduce emissions.1

Where do green bonds fit within a portfolio?

The green bond market, as measured by the S&P Green Bond Select Index, which represents the investable global green bond market and includes all issuer types (excluding tax-exempt U.S. municipal bonds) across countries and currencies, generally resembles a high quality, core global bond allocation. With over 50% of its holdings rated AA and above, and nearly 40% U.S. dollar-denominated, as well as a yield and duration profile similar to the Bloomberg Barclays Global Aggregate Bond Index, the green bond market has risk and return characteristics comparable with the broad global bond market. As a result, replacing a portion of a core global bond allocation with green bonds may have minimal impact to an investor's portfolio. Because of the differences in sector exposures, adding green bonds may also increase the diversification of a global bond allocation. For example, supranational issuers represent approximately 20% of the green bond universe versus only 2% of the Bloomberg Barclays Global Aggregate Bond Index.

Given the overall high quality of the green bond universe, the primary risks to an investor are interest rate and foreign currency risk. Also, green bonds have exhibited low historical correlation to the broad U.S. fixed income market, suggesting potential diversification benefits within a U.S.-focused portfolio.

A potential hedge against climate risk

Lastly, for those who recognize the potentially significant effects that climate change may have on companies and governments in the future, the idea that adding exposure to green bonds may have minimal immediate impact to a portfolio's risk and return profile may represent a "free option" to hedge climate-related risks. Green bond issuers are addressing these risk factors, and in the case of project or revenue bonds, bond payments are directly tied to a green project. In a world where investors start to place a significant price on environmental risks, green bonds may provide protection versus a bond portfolio that does not take these factors into account.

Green Bonds are an Increasing Share of the Overall Global Bond Market

As debt-burdened governments grapple with the massive challenges of addressing climate change, private capital must play an integral role in financing the infrastructure needed to transition to a low carbon economy. Government actions to promote green finance and the continued development of green bond market standards will likely drive the growth that is needed. As a result, we expect green bonds to make up an increasingly large share of the overall global debt market, and consequently, within investors' core fixed income portfolios.

You can access the green bond market through VanEck Vectors™ Green Bond ETF (GRNB) .

Green your Global Bond Portfolio
As of 2/28/2017

Green your Global Bond Portfolio Chart

Source: S&P Dow Jones Indices, Bloomberg Barclays and Morningstar, as of 2/28/2017. Green Bonds are represented by the S&P Green Bond Select Index. Global Aggregate Bonds are represented by the Bloomberg Barclays Global Aggregate Bond Index. Correlation based on monthly returns between the S&P Green Bond Index and the Bloomberg Barclays U.S. Aggregate Bond Index, July 2014 to February 2017. Yield as measured by yield to worst. Index returns are not representative of fund returns. For fund returns current to the most recent month-end visit vaneck.com. Past performance is no guarantee of future results.

Click here to see GRNB holdings

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The Evolution of Electric Vehicle Batteries: Part 2 https://www.vaneck.com/blogs/natural-resources/evolution-electric-vehicle-batteries-part-2/ Our long-term view on the EV industry is positive. Here we take a closer look at changing regulations and leading adopters, like China. 

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VanEck Blog 3/24/2017 12:00:00 AM

This is part two of a two-part series by Ms. Zhang that explores the economics of electric vehicle (EV) batteries, which are rapidly developing, arguably at a quicker pace than stationary battery storage (read Part 1). Part 2 looks at how regulatory policy is on the side of electric vehicles, and how we believe that the adoption of electrification will be an inevitability. Alternative energy is an important part of our natural resources equities investment strategy.

Regulatory Policy Changes Support Electric Vehicles

We believe that we are not far from what is likely to be a sustainably, profitable industry. The pace of EV cost cuts, research and development (R&D) support in new tech development, and broad global support for EV augur well for electrification in the coming decades. In Part 1 we explored the basic economics of the EV battery industry and the overarching need for cost reductions; here we take a closer look at the regulatory environment and leading adopters, like China.

An array of subsidies, tax benefits, and exemptions otherwise applied to traditional, or internal combustion engine (ICE) vehicles is currently being employed to help in the adoption of electric vehicles (EVs) by making their price more palatable to consumers. While government support is significant in China, it varies in South Korea, Japan, parts of Europe (Germany and France), and the U.S.

China's Favorable Path for EV Adoption

China, in our view, has led the way in paving a favorable path for EV adoption given its lofty targets for reducing CO2. China currently employs some of the harshest regulations on ICE vehicles. In Beijing, for example, road space rationing (restricting cars that could only enter common road space based on the last digit of the license plate number on certain set days) was a policy implemented and tightly adhered to during and following the Beijing 2008 Summer Olympics as a means to keep pollution in check. EVs in China, however, enjoy an ~30% combined federal/city subsidy, zero tax (~10% of vehicle price), and are exempt from road space restrictions.

In addition to EV purchase subsidies, China has also rolled out a number of initiatives around the infrastructure development necessary to support electric vehicles on the roads. China has set certain targets for its most urbanized cities and provinces and is nationally aiming to deploy 12,000 charging stations and 4.8 million charging piles by 2020 to help meet its target of 5 million new energy vehicles (NEVs), which includes plug-in vehicles in additional to pure EVs. China moved into the lead in 2016 in terms of EV adoption, and its aggressive government policies are expected to extend this lead in the coming years.

China Has Highest Adoption Rate for EV (BEV+PHEV)* in 2016

China Has Highest Adoption Rate for EV (BEV+PHEV)* in 2016 Chart

*BEV refers to Battery Electric Vehicles (Tesla's Model S falls into this category). PHEV refers to Plug-in Hybrid Electric Eehicles (the Chevy Volt is an example).
Source: SNE Research, IHS, and Bernstein estimates (2016 and beyond) and analysis. Past performance is no guarantee of future results.

While EVs will generally comprise approximately 5% of China's total cars on the road, the urban density in cities such as Beijing and Shanghai create economically efficient metros in which to implement local infrastructure conducive for electric vehicles, particularly since EV adoption addresses the mileage issue that is paramount to making the switch from ICE.

In addition to the Chinese government's support for electric vehicles, its stringent policies toward ICE vehicles appears to craft a compelling long-term case in favor of EV. For example, just meeting the compliance requirements of China's 2020 fuel economy target of a 28% reduction in fuel consumption is likely to add another $1,000 in cost to each ICE vehicle. The cost increase will largely result from hardware upgrades to the emissions systems, as well as more efficient start-stop systems, gear shift indicators, and A/C systems.

Steady or Not, EV Adoption will Happen: NextEV is a Case Study

In our December travels to China, we had a memorable meeting with NextEV1 that illustrated the tangibility and inevitability of EV. The startup NextEV is a privately owned Chinese EV manufacturer and current participant in the Formula E series (the EV equivalent of Formula 1). In October 2016, NextEV opened its U.S. based headquarters in San Jose, CA, and is among a handful of Chinese EV companies tapping into Silicon Valley's engineering and software expertise. While NextEV intends to launch a cheaper competitor to Tesla's Model X in a year, it recently unveiled the Nio EP9 electric supercar, currently dubbed the world's fastest electric car (0 to 100km/h in 2.7 seconds, with a top speed of 313km/h; by comparison, Tesla's S P90D pulls 0-100km/h in 2.8 seconds, with a top speed of 249 km/h).

While NextEV's business model may seem nearly identical to Tesla's, there is a key differentiator: the NextEV consumer does not pay for the battery pack up front. This results in significant savings on the purchase price and, thus, makes pure EV instantly competitive with ICE. NextEV retains ownership of the battery and charges the consumer based on usage, employing vehicle telematics (the technology of sending, receiving, and storing information relating to vehicles via telecom devices), a fee conceptually similar to paying for gas and maintenance on an ICE vehicle. With continued declines in lithium-ion battery costs, the economics work for this type of business model, whereby the company assumes the liability of an increasingly cheap asset, but enjoys the rental economics benchmarked to the relative cost of a more expensive alternative.

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Consider BDCs for High Income Potential with Low Interest Rate Risk https://www.vaneck.com/blogs/etfs/bdcs-high-income-low-interest-rate-risk/ ]]> VanEck Blog 3/22/2017 12:00:00 AM

Business Development Companies (BDCs) can complement an income allocation and enhance yield without adding significant interest rate risk. BDCs have, historically, also offered a competitive risk/return tradeoff when compared with high yield bonds, leveraged loans, and equities across the market capitalization spectrum (see chart below). At the same time that rising interest rates are weighing on income investors, the desire for yield persists. However, investors have options without the meaningful interest rate duration1 found with traditional fixed income investments, and BDCs are one of those options.

What are Business Development Companies?

BDCs lend to and invest in small- to mid-sized private companies, which tend either to be rated below investment grade or not rated at all. Allocating to BDCs helps investors gain exposure to the growth and income potential of privately held companies, access that has traditionally been limited to institutional or high net worth investors.

The dividend yields of BDCs have historically averaged 8.7%.2 These yields have been driven, in part, by the BDC's loan portfolios. Although the borrowers are typically leveraged entities, BDCs themselves are considered low leverage, since they are restricted to a 1:1 debt-to-equity ratio. A particularly pertinent feature of BDC portfolios today is that, on average, more than 70% of the loans made by BDCs include a floating rate feature.3 These loans, in general, reset interest payments based on three-month LIBOR4 interest rate floors of 1%-1.25%. With three-month LIBOR currently over 1.1%,5 many BDCs' loan portfolios may now benefit from the floating rate feature by adjusting their yields upwards should interest rates further increase.

Investors should note, though, that the high yield of BDCs is an indication of potential credit risk. While the majority of loans in the BDC space are senior secured loans6 (which can help increase the loan recovery potential in the event of a default), investors should have a risk tolerance for below-investment grade (i.e., high yield/BB+ or below) rated securities. In addition, publically listed BDCs are equities and, as such, may be sensitive to investor sentiment and subject to greater volatility than found with high yield bonds or leveraged loan portfolios.

Where do BDCs fit into a portfolio?

The following risk/return chart helps to illustrate where BDCs may have a place in an investor's portfolio. The proxy used for the publicly listed investable BDC space is the MVIS™ US Business Development Companies Index (MVBIZDTG). As the chart shows, BDCs have offered a competitive risk/return tradeoff against high yield bonds, leveraged loans, and equities across the market capitalization spectrum. Since the MVBIZDTG was launched on 8/4/2011, its average volatility has been less than that of other equity indices and it has meaningfully outperformed both high yield bond and leveraged loan indices.

Annualized Standard Deviation versus Annualized Return (%)
8/4/2011 – 3/13/2017

Annualized Standard Deviation versus Annualized Return Chart

Source: FactSet, Bloomberg. Data as of March 13, 2017. Past performance is no guarantee of future performance. Index performance is not indicative of fund performance. Indices are not securities in which investments can be made. See index descriptions and additional disclosure below.

High yield or equity income investors may want to consider a diversified allocation of BDCs to complement their traditional income portfolios. With their access to the private middle market space, BDCs have offered an historically attractive yield component and growth potential. In addition, with more than 70%, on average, of BDCs' loan portfolios structured as floating rate loans, their income is positioned to rise within a rising rate environment.

 

Investors can gain exposure to BDCs through VanEck Vectors™ BDC Income ETF (BIZD).

IMPORTANT DISCLOSURE

1Duration is a measure of the price sensitivity of a debt instrument to interest rate changes. It approximates the percentage decline in price returns for a 1% increase in market interest rate.

2Source: FactSet. Data as of 3/13/2017. Dividend yield is the dividend per share, divided by the price per share.

3Sources: BDC financial statements as available on the BDCs, comprising the MVIS™ US Business Development Companies Index (MVBIZDTG). Data as of 12/31/2016, as available on the BDCs' Web sites.

4LIBOR (London Interbank Offer Rate) refers to the benchmark used by banks, securities houses and investors to gauge the cost of unsecured borrowing in the money markets for various periods of time and currencies.

5Source: FactSet. Data as of 03/13/2017. Note: LIBOR rates have nearly doubled since last year, as the U.S. Securities and Exchange Commission (SEC) has enacted money market reform, changing the prime money market funds' net asset value (NAV) from a fixed NAV to a floating NAV in October 2016. In response to the 2007-2008 financial crisis, the SEC adopted a first series of amendments to its rules on money market funds in 2010 that were designed to make money market funds more resilient by reducing the interest rate, credit, and liquidity risks of their portfolios. Although these reforms improved money market fund resiliency, the Commission said at the time that it would continue to consider whether further, more fundamental changes to money market fund regulation might be warranted. After further review, on July 23, 2014, the Commission adopted more fundamental structural changes to the regulations of money market funds. These reforms require prime institutional money market funds to "float their NAV" (no longer maintain a stable price) and provide non-government money market fund boards with new tools — liquidity fees and redemption gates — to address runs. These changes took effect on October 14, 2016. https://www.sec.gov/spotlight/money-market.shtml

6Sources: BDC financial statements as available on the BDCs, comprising the MVIS™ US Business Development Companies Index (MVBIZDTG). Data as of 12/31/2016, as available on the BDCs' Web sites.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed in this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

The indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees, or expenses that are associated with an investment in any underlying exchange-traded funds. Index performance is not illustrative of fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com. Historical performance is not indicative of future results; current data may differ from data quoted. Indexes are unmanaged and are not securities in which an investment can be made.

BDCs: The MVIS US Business Development Companies Index is a rules-based index intended to track the overall performance of Business Development Companies (BDCs). U.S. High Yield Bonds: BofA Merrill Lynch US High Yield Index (H0A0) tracks the performance of U.S. dollar-denominated below investment grade corporate debt publically issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating. REITs: FTSE NAREIT Equity REITs Index is a broad-based, free-float adjusted market capitalization weighted index consisting of equity real estate investment trusts. U.S. Leveraged Loans: S&P/LSTA U.S. Leveraged Loan 100 Index seeks to mirror the market-weighted performance of the largest institutional leveraged loans as determined by criteria based upon market weightings, spreads, and interest payments. U.S. Stocks: Standard & Poor's 500® Index, calculated with dividends reinvested, consists of 500 widely held common stocks covering the industrial, utility, financial, and transportation sectors. U.S. Mid Cap Stocks: Russell Midcap Index measures performance of the 800 smallest companies (31% of total capitalization) in the Russell 1000 Index, with weighted average market capitalization of approximately $6.7 billion, median capitalization of $3.6 billion, and market capitalization of the largest company $13.7 billion. U.S. Small Cap Stocks: Russell 2000 Index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks.

MVIS US Business Development Companies Index is the exclusive property of MV Index Solutions GmbH (a wholly owned subsidiary of the Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors BDC Income ETF (the "Fund") is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.

Business Development Companies (BDCs) invest in private companies and thinly traded securities of public companies, including debt instruments of such companies. Generally, little public information exists for private and thinly traded companies and there is a risk that investors may not be able to make fully informed investment decisions. Less mature and smaller private companies involve greater risk than well-established and larger publicly-traded companies. Investing in debt involves risk that the issuer may default on its payments or declare bankruptcy and debt may not be rated by a credit rating agency. Many debt investments in which a BDC may invest will not be rated by a credit rating agency and will be below investment grade quality. These investments have predominantly speculative characteristics with respect to an issuer's capacity to make payments of interest and principal. BDCs may not generate income at all times. Additionally, limitations on asset mix and leverage may prohibit the way that BDCs raise capital. The Fund and its affiliates may not own in excess of 25% of a BDC's outstanding voting securities which may limit the Fund's ability to fully replicate its index. Small- and medium-capitalization companies may be subject to elevated risks. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Diversification does not assure a profit nor protect against loss.

Merrill Lynch, Pierce, Fenner & Smith Incorporated and its affiliates ("BofA Merrill Lynch") indices and related information, the name "BofA Merrill Lynch", and related trademarks, are intellectual property licensed from BofA Merrill Lynch, and may not be copied, used, or distributed without BofA Merrill Lynch's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by BofA Merrill Lynch. BOFA MERRILL LYNCH MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).

The information herein represents the opinion of the author(s), but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.

An investment in the Fund may be subject to risks which include, among others, credit risk, call risk, and interest rate risk, all of which may adversely affect the Fund. High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will generally decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

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Foreign Investor Interest in Municipal Bonds Grows https://www.vaneck.com/blogs/muni-nation/foreign-investor-interest-municipal-bonds-grows/ The attractive yields of U.S. municipal bonds are proving to be enticing to yield-starved foreign investors who cannot find comparable yields at home.

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VanEck Blog 3/20/2017 1:13:48 PM

Increasing Levels of Muni Bonds Held by Foreign Investors

Foreign holdings of debt issued by U.S. states and local governments rose 16% in the last quarter of 2016, reaching a record level of $106.4 billion.1 While foreign ownership represents just a small fraction of the $3.8 trillion U.S. municipal bond market,2 it is a growing segment that has risen steadily since 2000. In the past two years alone, foreign ownership of muni bonds has increased 32%, from $80.6 billion at the end of 20143 to its present $106.4 billion.

Although the tax-free coupon is a key advantage of investing in municipal bonds, it is only available to U.S. investors. Foreign buyers have not been deterred, and continue to pour into the American muni bond market in search of higher yields from perceived low risk infrastructure investments. The attractive yields of U.S. municipal bonds are proving to be attractive to yield-starved foreign investors who struggle to find comparable yields at home.

Rising Foreign Ownership of Municipal Bonds

Annualized Standard Deviation versus Annualized Return Chart

Source: Federal Reserve Board. Data as of 12/31/2016. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Build America Bonds Pave the Way…

Build America Bonds (BABs), which were introduced in 2009 under the American Recovery and Reinvestment Act, may have helped set the stage for this ballooning foreign interest in muni bonds.4 The BABs program sought to spur financing for "shovel-ready" municipal projects by reducing the cost of borrowing for state and local governments through federal issuer subsidies and refundable tax credits to bondholders. Unlike traditional muni bonds, BABs featured taxable interest, which helped bring a much broader base of investors into the fold, most notably foreign investors, who may have been interested in investing in high-quality infrastructure projects before, but had previously seen little advantage in holding tax-exempt muni bonds.

…and Yields Beckon

Although BABs are no longer issued (the program expired in December 20105), they clearly served to whet foreign investors' appetites for munis. In a world where governments throughout Europe and Asia are holding interest rates very low, and some government debt actually offering negative yields, the $3.8 trillion U.S. muni bond market, tax free or not, is arguably attractive.

Default Rates not a Significant Worry

Muni bonds are also attractive to foreign investors for another reason: they are perceived as safe havens, being thought similar to U.S. Treasuries, with near-zero default rates. We believe the safe haven reputation is well deserved. Although, unlike U.S. Treasuries, muni bonds are not guaranteed by the full faith and credit of the U.S. government, according to Moody's Investors Service, the 1970-2015 average cumulative 10-year default rate for all rated muni bonds was a tiny 0.15%. In comparison, all rated global corporate bonds averaged a 10.16% 10-year default rate over the same period. What's more, muni bond yields can sometimes be higher than U.S. Treasuries and Corporates.

A Perfect Storm for Foreign Investors

Higher yields, very low historical default rates, and the asset class's diversification benefits (-0.10% correlation to U.S. stocks6) have all combined to create a nearly "perfect storm" of foreign interest in munis, the effects of which are being felt within the municipal bond market. Demand for munis has generally outstripped supply for some time now. This demand for muni bonds could potentially encourage more issuers to enter the market, both issuers of tax-exempt and taxable bonds.

Muni Bond ETFs Can Offer Easy Access

Municipal bond ETFs can be an excellent way for investors, domestic and foreign alike, to access munis. Rather than being forced to shop around and evaluate individual muni bonds on their merits, investors can opt for municipal bond ETFs, which track rules-based indices of muni bonds. By holding baskets of muni bonds, these ETFs can offer important diversification benefits as well—the risk is distributed amongst the ETF's holdings, and the already low risk of default or impairment may be further mitigated. Muni bond ETFs have also been much more liquid than the underlying bonds and can be bought and sold throughout the day like stocks.

Foreign interest in muni bonds is readily apparent within our own ETFs. Of the $1.8 billion invested in the VanEck Vectors™ High-Yield Municipal Index ETF (HYD) as of January 31, 2017, 6.5% of the fund's assets come from abroad: $117 million. Of that $117 million, nearly $100 million is from Taiwan, where yields on 10-year government bonds have been hovering around 1.1%, albeit with an Aa3 rating, as of November 2016, according to Moody's. HYD's 30-day SEC yield currently stands at 4.47% (as of 3/7/2017). In the VanEck Vectors™ AMT-Free Intermediate Municipal Index ETF (ITM) , the proportion of foreign money invested is significantly less: just 0.3% of $1.5 billion under management, or $3.9 million.7

Click here to view HYD standardized performance

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The Rise of Green Bonds https://www.vaneck.com/blogs/etfs/rise-of-green-bonds/ Martina Macpherson, Head of Sustainability Indices, S&P Dow Jones Indices, shares her insights on the growth of the green bond market. 

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VanEck Blog 3/16/2017 1:51:14 PM

VanEck Vectors™ Green Bond ETF (GRNB) is the first U.S.-listed fixed income ETF to provide targeted exposure to the fast-growing green bond market. GRNB seeks to track the performance and yield characteristics of the S&P Green Bond Select Index (SPGRNSLT), part of a suite of green indices introduced by S&P.

We asked guest author Martina Macpherson, Head of Sustainability Indices, S&P Dow Jones Indices, to share her insights on the growth of the green bond market and to discuss the important role of her firm's indices.

 

Over the past decade, green bonds have emerged as a valuable tool to mobilize the global investment community. Although green bonds accounted for less than 1% of all bonds issued in 2016, the potential for scaling up is substantial, according to the Climate Bonds Initiative (CBI).1

Green Finance and Sustainable Development: The Role Green Bonds Can Play

Green bonds can play an important role in engaging institutional market participants in the transition to low-carbon and climate-resilient development and growth,2 in order to meet the United Nations Framework Convention on Climate Change goal3 of limiting global warming to 2°C above pre-industrial temperatures and the climate mitigation, adaptation and finance commitments as set out in the Paris Agreement (2016)4 — and scaling up green bond issuances for sustainable development has become a key aim for issuers and investors alike.5

Increasingly, green bonds are used to support infrastructure, transportation, and other sustainable development projects. In particular, sustainable urban development is becoming a pre-requisite6 given that by 2050 it is expected that 70% of the world's population will be in cities. Green and social bonds will have a leading role to play, according to the Green City Bond Coalition.7

However, the speed and scale at which the green bond market could develop in 2017 and beyond depends on multiple variables, including policy and regulatory factors, market conditions, and financing trends.8 This new market faces a range of specific challenges and barriers, such as underdeveloped domestic bond markets, issuers' views on costs versus benefits, a mismatch between projects, bonds, and institutional investors, and a lack of commonly accepted green standards and definitions.9

Since their inception in 2014, the Green Bond Principles (GBPs), a set of voluntary process and reporting guidelines for the use of proceeds of green bonds,10 have been at the center of the effort to promote voluntary principles for green finance. The Principles have achieved broad market acceptance, as well as recognition by policymakers and regulators.

Over the past two years, multiple taxonomies in line with the GBPs have been developed to provide market participants with confidence in the issuer's claims regarding the environmental (or sometimes social) credentials of the bond.

They include second-party opinions and third-party reviews, such as the CBI Standard, as well as the government-backed "Green Bond Guidelines" and a "Green Bond Endorsed Project Catalogue," published by the People's Bank of China and the Green Finance Committee of China Society of Finance and Banking in 2015-2016. They are now widely used to verify the "green credentials" of green bond issuances around the world.

In addition, four stock exchanges, the Luxembourg Stock Exchange, Oslo Stock Exchange, London Stock Exchange, and Bolsa Mexicana de Valores (BMV), have launched green bond listing requirements and trading models.11

Increasingly, market participants are calling for more alignment and single metrics for green bond assessments to speed up market growth.12 Over the course of 2017, we can expect to see further standardization and alignment of green bond assessment frameworks,13 as called for in the September 2016 "G20 Communiqué on Green Finance"14 and by the Bank of England's Mark Carney15—he also recommended that policymakers look at tax incentives to encourage market growth.

These developments should provide more clarity on green finance definitions, facilitate cross-border investment in green and social bonds, and improve the measurement of green finance activities and their impacts.

Encouraging Market Growth: Green Bond Indices

However, despite the emphasis that investors have put on sustainable investment and green finance issues, the green bond market itself remains still relatively small, particularly when considering benchmark size deals for government and agency bonds.

So from theory into practice: how can the green bond market live up to investor's expectations?

Green bond indices can help, by aligning investors' sustainable investment and green finance goals with their long-term risk-return objectives.

Hence, in 2014, S&P Dow Jones Indices launched one of the first green bond indices, the S&P Green Bond Index (Ticker: SPUSGRN), which was followed by the launch of the S&P Green Bond Select Index (Ticker: SPGRNSLT), in February 2017. The index is a sub-index of the S&P Green Bond Index with additional eligibility criteria intended to enhance liquidity, and provides the foundation for one of the world's first green bond ETFs.

These S&P Green Bond Indices are comprised of a universe of global bonds that are labelled "green" by their issuers, independently assessed by the Climate Bonds Initiative (via CBI flags), with additional filters applied.

Source: S&P Dow Jones Indices. Data as of Dec 31, 2016. Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.

IMPORTANT DISCLOSURE

1Climate Change Initiative, Scaling Up the Green Bond Markets for Sustainable Development, September 2015.

2World Bank, Zurich, Mirova, Pension Fund Service Local Government, Green Bonds, April 2015.

3UNFCCC, Framework Convention on Climate Change, Copenhagen, Dec. 7–Dec. 8, 2009.

4UNFCCC, Adoption of the Paris Agreement, 12 December 2015.

5CBI/UNEP FI, Scaling Up Green Bond Markets for Sustainable Development, November 2015.

6U.N. City Prosperity Initiative, Metropolitan Cities International Conference: Municipal Finance & Urban Economy, July 2016.

7See e.g. Green City Bond Coalition (C40, CBI, CERES et al), How to Issue a Green Muni Bond, 2015 for more details.

8OECD/Bloomberg, Green Bonds - Mobilising the Debt Capital Markets for a Low-Carbon Transition, December 2015.

9G20 Green Finance Study Group, G20 Green Finance Synthesis Report, Sept. 5, 2016.

10ICMA, Green Bond Principles, April 2014.

11See Climate Bonds Initiative, China Green Bond Market, January 2017, for more details.

12See Responsible Investor, Green Bond Round Up, January 17, 2017 for more details.

13Most notably the "Paris Green Bond Statement," which was signed by 27 investors representing over USD 11.2 trillion of total. AUM, in December 2015 - Climate Bonds Initiative, The Paris Green Bonds Statement, December 2015.

14G20, Leaders' Communique Hangzhou Summit 2016, September 2016.

15Mark Carney, Resolving the Climate Paradox: Address by Mark Carney BoE Gov. & FSB Chair: Arthur Burns Memorial Lecture, Berlin, September 22, 2016.

Copyright © 2017 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission. STANDARD & POOR'S and S&P are registered trademarks of Standard & Poor's Financial Services LLC, a division of S&P Global ("S&P"); DOW JONES is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC. S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates, and their third-party data providers and licensors (collectively "S&P Dow Jones Indices Parties") makes no representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and S&P Dow Jones Indices Parties shall have no liability for any errors, omissions, or interruptions of any index or the data included therein. Past performance of an index is not an indication or guarantee of future results. This document does not constitute an offer of any services. All information provided by S&P Dow Jones Indices is general in nature and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties and providing custom calculation services. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments offered by third parties that are based on that index. S&P Dow Jones Indices Parties do not sponsor, endorse, sell, promote or manage any investment fund or other investment product or vehicle that seeks to provide an investment return based on the performance of any Index. S&P Dow Jones Indices LLC is not an investment or tax advisor. S&P Dow Jones Indices Parties make no representation regarding the advisability of investing in any such investment fund or other investment product or vehicle. A tax advisor should be consulted to evaluate the impact of any tax-exempt securities on portfolios and the tax consequences of making any particular investment decision. Credit-related information and other analyses, including ratings, are generally provided by licensors and/or affiliates of S&P Dow Jones Indices, including but not limited to S&P Global's other divisions such as Standard & Poor's Financial Services LLC and S&P Capital IQ LLC. Any credit-related information and other related analyses and statements are opinions as of the date they are expressed and are not statements of fact. S&P Dow Jones Indices LLC is analytically separate and independent from any other analytical department. For more information on any of our indices please visit www.spdji.com.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

The information herein represents the opinion of the author(s), but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

An investment in VanEck Vectors Green Bonds ETF (GRNB) may be subject to risks which include, among others, credit rating downgrades, issuers that may be unable and/or unwilling to make timely interest payments and/or repay the principal on its debt, high yield securities risk, call risk, and interest rate risk, all of which may adversely affect the Fund. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Changes in currency exchange rates may negatively impact the Fund's return. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

The S&P Green Bond Select Index (the "Index") is a product of S&P Dow Jones Indices LLC or its affiliates ("SPDJI"). Standard & Poor's® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P") and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"). VanEck Vectors Green Bond ETF (the "Fund") is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, "S&P Dow Jones Indices"). Neither S&P Dow Jones Indices make any representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Index to track general market performance. S&P Dow Jones Indices only relationship to Van Eck Associates Corporation ("VanEck") with respect to the Index is the licensing of the Index and certain trademarks, service marks and/or trade names of S&P Dow Jones Indices and/or its licensors. The Index is determined, composed and calculated by S&P Dow Jones Indices without regard to VanEck or the Fund. S&P Dow Jones Indices has no obligation to take the needs of VanEck or the owners of the Fund into consideration in determining, composing or calculating the Index. S&P Dow Jones Indices is not responsible for and has not participated in the determination of the prices, and amount of the Fund or the timing of the issuance or sale of the Fund or in the determination or calculation of the equation by which the Fund is to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing or trading of the Fund. There is no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice.

S&P DOW JONES INDICES DOES NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY VANECK, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW JONES INDICES AND VANECK, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.

Fund shares are not individually redeemable and will be issued and redeemed at their Net Asset Value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual Fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will generally decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

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Positive Momentum Marches On https://www.vaneck.com/blogs/allocation/positive-momentum-marches-on/ VanEck NDR Managed Allocation Fund continued to aggressively favor global stocks over bonds going into March, with the NDR indicators reconfirming this decidedly bullish position.

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VanEck Blog 3/15/2017 4:13:11 PM

VanEck NDR Managed Allocation Fund

VanEck NDR Managed Allocation Fund (NDRMX) tactically adjusts its asset class exposures each month across global stocks, U.S. fixed income, and cash. It utilizes an objective, data-driven process driven by macroeconomic, fundamental, and technical indicators developed by Ned Davis Research ("NDR"). The Fund invests based on the weight-of-the-evidence of its objective indicators, removing human emotion and decision making from the investment process. The expanded PDF version of the following commentary below can be downloaded here.

Fund Positioning March 2017

Combining all of the evidence from the macroeconomic, fundamental, and technical indicators reconfirmed VanEck NDR Managed Allocation Fund's (NDRMX) decidedly bullish position going into March, with the model continuing to favor global stocks over bonds. As of March 1, the Fund has maintained its aggressive posture, with an 81.0% allocation to global stocks (down slightly from 81.7% at February 1) and an 18.4% allocation to bonds (up from 17.9% as of February 1); cash continued to be minimal at 0.6%. The regional equity allocations shifted to favor a larger overweight position in Europe ex U.K., and reduced positions in Japan, the Emerging Markets, and Pacific ex Japan. Within the U.S., the overweight positions favoring value over growth and small-cap over large-cap were reduced, given that the weight-of-the-evidence is now less bullish on both.

Fund Positioning March 2017 Pie Charts

Source: VanEck. Data as of March 1, 2017.

February 2017 Performance Review

The U.S. equity market continued to climb higher in February. The Federal Reserve's decision not to hike interest rates at its January 31-February 1 meeting provided a tailwind for investors for the month (the Fed did raise rates 0.25% at its March 14-15 meeting). The two primary forces that drove the market higher were strengthening U.S. economic and fundamental data, and prospects for stronger growth based on President Trump's pro-business agenda. U.S. economic data released in February were encouraging, including an increase in corporate earnings growth, rising inflation, and an uptick in U.S. home sales.

In February, VanEck NDR Managed Allocation Fund (NDRMX) returned 1.79% versus 1.98% for its benchmark consisting of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index). The Fund benefited from a meaningful overweight position in global equities over bonds, as the MSCI All Country World Index returned 2.85% versus 0.67% for the Bloomberg Barclays US Aggregate Bond Index. Regionally, the Fund was helped by its overweight positions in the U.S. and Pacific ex Japan, and by having no exposure to Canada. By contrast, Fund underweight position in the Emerging Markets and overweight position in Europe ex U.K. Within U.S. equities, the Fund lagged primarily due to its overweight positions in small-cap over large-cap and value over growth.

On a since inception (5/11/16) basis, the Fund continues to outperform its benchmark,1 with a return of 8.43% return versus 7.77%.

Total Returns (%) as of February 28, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.79 8.43
Class A: Maximum 5.75% load -4.05 2.21
60% MSCI ACWI/
40% BbgBarc US Agg.1
1.98 7.77
Total Returns (%) as of December 31, 2016
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.44 5.27
Class A: Maximum 5.75% load -4.39 -0.77
60% MSCI ACWI/
40% BbgBarc US Agg.1
1.38 3.88

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at net asset value (NAV). Index returns assume that dividends of the Index constituents in the Index have been reinvested.

Returns less than a year are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.34%.
Expenses are capped contractually until 05/01/18 at 1.15% for Class A. Caps exclude certain expenses, such as interest.

Weight-of-the-Evidence: Technical Indicators are Bullish on Global Stocks Over Bonds

While the Fund relies on macroeconomic, fundamental, and technical indicators, because of the uniformity of the readings in February, we will focus on the technical indicators. As of March 1, almost all of the individual NDR technical indicators are bullish on stocks over bonds. Consequently, the composite, or aggregation, of technical indicators is very bullish as shown below.

NDR Stock/Bond Technical Composite, 2012 to 2017

NDR Stock/Bond Technical Composite 2012 to 2017 Chart

Source: Ned Davis Research. Data as of February 28, 2017.
NDR Stock/Bond Technical Composite, 2012 to 2017. Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

Momentum Shows a Positive Price Trend for Global Stocks

Momentum is a potent investment factor. Momentum measures the rate of change in prices and identifies trends in the market. The idea is that outperforming securities often continue to outperform and underperforming securities often continue to underperform. Momentum can either build or erode investor confidence, which then feeds upon itself, and can ultimately impact prices. Positive momentum makes investors feel like the market can do no wrong. Negative momentum can do the opposite. For many, this market seems as if it can do no wrong. Of course, we know that markets cannot go up forever. Let's just enjoy this positive momentum while we can.

Positive momentum continued going into March. The NDR momentum indicator below measures the momentum of global stocks relative to bonds. Readings above 0.5 indicate that momentum is positive for stocks, and is, therefore, a bullish signal. Once the indicator establishes a bullish signal, it remains bullish until it falls below -1, at which time it will produce a bearish signal.

The momentum phenomenon is not isolated just to investing. We visited clients in Boston in February who were in full celebration over the Super Bowl victory by their beloved Patriots. Anyone who watched that game can attest to the power of momentum.

NDR Stock/Bond Momentum Indicator, 2012 to 2017

NDR Stock/Bond Momentum Indicator 2012 to 2017 Chart

Source: Ned Davis Research. Data as of February 28, 2017.
Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

Additional Resources

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Global Outperformance and U.S. M&A Persist https://www.vaneck.com/blogs/moat-investing/us-mergers-acquisitions-persist/ Global moats continued their impressive performance stretch, which began a year ago, by posting strong returns in February relative to broad U.S. and international equity markets.

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VanEck Blog 3/15/2017 12:00:00 AM

For the Month Ending February 28, 2017

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") continued its strong start to the year by outperforming the S&P 500® Index (5.15% vs. 3.97%) in February. International moat stocks as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index") also expanded its 2017 performance gap over the MSCI All Country World Index ex USA by outpacing the Index for the month (2.25% vs. 1.29%).

U.S. Domestic Moats: Buy Buy Baby

Infant formula company Mead Johnson Nutrition Co. (MJN US, +24.60%) benefited from corporate action news shortly after being added to the U.S. Moat Index in December. News of an intended acquisition of MJN US by narrow moat UK conglomerate Reckitt Benckiser Group (RB GB) boosted shares of the company in February. MJN US joins other recent constituents to benefit from acquisition activity: LinkedIn Corp., St. Jude Medical, Inc., and Time Warner, Inc. It’s been a wild ride for pharmaceutical and biotech companies since last year’s U.S. presidential election, but Morningstar’s economic moat and valuation research within both industries benefited the U.S. Moat Index as several of the top drivers of performance came from within those industries. Materials firm Compass Minerals International (CMP US, -8.47%) struggled for the month and was the leading detractor from U.S. Moat Index performance. CMP US, a producer of road deicing salt, was negative impacted by a notable drop in road salt prices.

International Moats: Catch Me if You Can

Mexican airport operator, Grupo Aeroportuario del Centro Norte (OMAB MM, +12.70%), and its efficient scale source of moat, had a strong month as central Mexico air traffic increased year-over-year despite political turmoil and a weakened peso. In Australia, casino operator Crown Resorts Ltd. (CWN AU, +12.47%) offered strong returns despite controversy in China. According to Morningstar, the firm boasts defensive earnings quality and an attractive growth profile. Also contributing to the International Moat Index’s performance in February were healthcare companies out of Australia, Sweden, and the United Kingdom. Real estate firms in Singapore and Hong Kong also helped drive performance for the month. Otherwise strong performance from Indian constituents was muted by the struggles of automaker Tata Motors Ltd (TTMT IN, -11.41%), which were reflected in fiscal 2017 second-quarter earnings. Two Australian firms from different industries also struggled in February: mineral sands miner Iluka Resources Ltd. (ILU AU, -8.93%) and complimentary/supplementary medicine provider Blackmores Ltd. (BKL AU,-10.12%) posted disappointing quarterly results in February.

(%) Month Ending 2/28/17

Domestic Equity Markets

International Equity Markets

(%) As of 2/28/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 2/28/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
Mead Johnson Nutrition Company
MJN US
24.60
TransDigm Group Incorporated
TDG US
17.47
CBRE Group, Inc. Class A
CBG US
17.33
Tiffany & Co.
TIF US
16.70
Bristol-Myers Squibb Company
BMY US 15.36

Bottom 5 Index Performers
Constituent Ticker Total Return
Mondelez International, Inc. Class A
MDLZ US
-0.81
Zimmer Biomet Holdings, Inc.
ZBH US
-1.06
Gilead Sciences, Inc.
GILD US
-2.72
Twenty-First Century Fox, Inc. Class A
FOXA US
-4.65
Compass Minerals International, Inc.
CMP US
-8.47

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
Grupo Aeroportuario del Centro Norte SAB de CV Class B OMAB MM 12.70
Tata Consultancy Services Limited TCS IN 12.48
Crown Resorts Limited CWN AU 12.47
CapitaLand Limited CAPL SP 11.45
Dongfeng Motor Group Co., Ltd. Class H 489 HK 11.32

Bottom 5 Index Performers
Constituent Ticker Total Return
MGM China Holdings Limited 2282 HK -6.64
Cemex SAB de CV Cert Part Ord Repr 2 ShsA & 1 ShsB CEMEXCPO MM -8.29
Iluka Resources Limited ILU AU -8.93
Blackmores Limited BKL AU -10.12
Tata Motors Limited TTMT IN -11.41

View MOTI's current constituents

As of 12/16/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
CVS Health Corporation CVS US
Guidewire Software GWRE US
Bristol-Myers Squibb BMY US
Zimmer Biomet Holdings Inc ZBH US
TransDigm Group TDG US
Mead Johnson Nutrition Co MJN US
Mondelez International Inc MDLZ US
Pfizer Inc PFE US
Patterson Cos Inc PDCO US
Medtronic plc MDT US
Lowe's Cos Inc LOW US

Index Deletions
Deleted Constituent Ticker
The Bank of New York Mellon Corp BK US
State Street Corp STT US
US Bancorp USB US
Western Union Co WU US
Microsoft Corp MSFT US
LinkedIn Corp LNKD US
CSX Corporation CSX US
Norfolk Southern Corp NSC US
Harley-Davidson Inc HOG US
Tiffany & Co TIF US
Time Warner Inc TWX 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
Cemex SA CPO Mexico
KION Group AG Germany
Cheung Kong Property Holding Ltd Hong Kong
KT Corp South Korea
GlaxoSmithKline United Kingdom
Sun Hung Kai Properties Ltd. Hong Kong
CSL Ltd Australia
Iluka Resources Ltd Australia
Ramsay Health Care Ltd Australia
Orange France
ENN Energy Holdings Ltd China
Telefonica Brasil S.A. Brazil
KDDI Corp Japan
China Telecom Corporation Ltd. China
Sina Corp (Caymans) China
Tata Consultancy Services Ltd India
Nippon Tel & Tel Corp Japan
Singapore Exchange Ltd Singapore
GEA Group AG Germany
China Mobile Ltd. China
Industrial and Commercial Bank of China Ltd China
Fisher & Paykel Healthcare Corporation Ltd New Zealand
Telstra Corp Ltd Australia
Infosys Ltd India
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Danone France
DuluxGroup Ltd Australia
Bureau Veritas SA France
Carsales.com Ltd Australia
William Demant Hldg Denmark
Tencent Holdings Ltd. China
Nidec Corp Japan
Kao Corp Japan
Vicinity Centres Australia
Airbus Group France

Index Deletions
Deleted Constituent Country
Bank of Montreal Canada
Canadian Imperial Bank of Commerce Canada
National Bank of Canada Canada
Power Financial Corp Canada
Cameco Corp Canada
Lloyds Banking Group Plc United Kingdom
Henderson Group Plc United Kingdom
Carnival Pl United Kingdom
Kingfisher United Kingdom
Petrofac United Kingdom
National Australia Bank Ltd Australia
Westpac Banking Corp Australia
AMP Ltd Australia
Commonwealth Bank Australia Australia
Platinum Asset Management Limited Australia
Computershare Ltd Australia
BNP Paribas France
Kering France
Schneider Electric SE France
Carrefour SA France
Nordea AB Sweden
Svenska Handelsbanken Sweden
United Overseas Bank Singapore
Genting Singapore Plc Singapore
Julius Baer Group Switzerland
Roche Hldgs AG Ptg Genus Switzerland
Linde AG Germany
Bayer Motoren Werke AG (BMW) Germany
Wynn Macau Hong Kong
Sands China Ltd. Hong Kong
MGM China Holdings Ltd Hong Kong
Teva Pharmaceutical Industries Israel
SoftBank Group Corp Japan
Wipro Ltd India
Koninklijke Philips Elec NV Netherlands

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



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Emerging Markets Policy Orthodoxy is Creating Investment Opportunities https://www.vaneck.com/blogs/emerging-markets-bonds/policy-orthodoxy-investment-opportunities/ VanEck Blog 3/14/2017 12:00:00 AM

Markets are grappling with three big challenges: (1) a global trade slowdown and its impact on growth; (2) rising interest rates in the context of re- (or possibly stag-) flation; and (3) a wave of political instability in the developed markets that began with Brexit and is likely to continue this year with both multiple elections in Europe and the implementation (or lack thereof) of President Trump's policy agenda in the U.S. The central banks of developed markets are like flies trapped in alphabet soup (NIRP, ZIRP, etc.), while structural reforms are on the back burner.

Against this negative backdrop, we think the recent push for policy orthodoxy in several systemically important emerging markets economies is notable and promising. We believe that emerging markets countries are setting the pace and creating compelling investment opportunities for fixed income investors.

Greater Stability in Brazil, Russia, Argentina, and Mexico

Brazil, Russia, and Argentina are key examples of emerging markets that are rapidly implementing policy orthodoxy. We also believe that Mexico might join this list soon. The policy "acquittal" in these economies has four key elements: (1) letting currencies float; (2) hiking interest rates; (3) addressing fiscal deficiencies; and (4) creating a more stable political environment.

The decisions by Brazil, Russia, and Argentina to start using their currencies as shock absorbers was pivotal. This stopped the depletion of international reserves (Russia lost about a third of its reserves in currency interventions and Argentina's reserves halved) and it kick-started the process of external adjustment, putting their external balances on a firmer footing. Brazil posted a current account deficit of a mere 1.4% of GDP in the third quarter of 2016 versus 4.37% of GDP in the first quarter of 2015. Russia's current account surplus more than tripled between December 2013 and December 2015. Argentina's current account deficit is no longer deteriorating and now stands around 2.72% of GDP. It is true that the adjustment process is over in Russia (the current account surplus is smaller now) and we are likely to see the same in Brazil very soon. However, since this is a reflection of a nascent growth recovery boosting imports rather than reoccuring macro imbalances, we are not particularly concerned (especially in the case of Brazil, which is attracting massive foreign direct investment to finance the deficits).

Aggressive Tightening Policies

Any devaluation has an immediate cost in terms of rising inflation, but the very aggressive tightening of monetary policy in Brazil, Russia, and Argentina has kept this from being anything other than a one-off event. Russia's headline inflation has fallen to 5% year-on-year (after peaking at 16.9%) and Brazil's consumer price index ("CPI") fell to 5.35% in January 2017 (after peaking at 10.7%). The latest CPI print in Argentina signals that the country is finally turning the corner. Even though Russia and Brazil are now easing monetary policy, the central banks of both are proceeding with caution and targeting longer-term inflation (due to sticky inflation expectations in the case of Russia) at the expense of short-term growth considerations. As a result, the real policy rates, adjusted for 12-month expected inflation, in Russia and Brazil are still the highest among key emerging markets countries, while Argentina is among the top five – providing good compensation for local currency exposure.

Real Policy Rates (%) - Deflated by 12 mos. Expected Inflation

Real Policy Rates Chart

Source: VanEck; Bloomberg LP.

Orthodoxy is Extending to Fiscal and Governance Policies

In addition to orthodox monetary and exchange rate policies, these countries have also acquitted themselves in areas outside the control of their central banks – fiscal policy and governance/political environment. Russia's three-year fiscal projections look conservative (including under the assumption of crude oil at US$40 a barrel). Brazil has already approved a spending cap bill and is expected to pass pension reform legislation this year. This year started on a positive fiscal note with the central government outperforming in January due to lower discretionary spending. Argentina has just unveiled a more realistic three-year fiscal adjustment plan that aims to reduce the primary deficit from 4.2% of GDP in 2017 to 2.2% in 2019. Importantly, the newly-found fiscal realism was a result of a government reshuffle which improved governability and increased transparency.

Emerging Markets Showing Greater Stability than Developed Markets

Finally, while many developed economies are facing greater political uncertainty and headline risk, the political environment in these emerging markets countries looks more stable and conducive to structural changes. Brazil faced a huge corruption scandal and reacted by putting in place a political transformation. The current Temer government is functioning well, despite the on-going anti-corruption probe, and is apparently able to gather enough political support for fiscal reforms. Russia is a somewhat more special case – President Putin is not a liberal – but the country is very stable and Putin's key appointments in the central bank, Ministry of Finance, and Ministry of Economic Development speak for themselves – all are profoundly orthodox. In Argentina, President Macri ran and won on a reformist platform after voters were exhausted by heterodox policy under the previous administration.

Mexico Attractive, But Questions Remain

Questions remain, though, about Mexico, another key emerging markets country. It is true that the country's case is more mixed; Mexico’s central bank might need to tighten more in order to address inflation pressures stemming from the second-round inflation effects and pass-through from past currency weakness. However, even Mexico might finally see the light at the end of the tunnel.

First, the fundamental support for the currency appears stronger following: (a) the introduction of the new US$20B foreign exchange swap program (reducing the pressure on international reserves); and (b) what looks like the beginning of a current account adjustment (there was a massive outperformance in the fourth quarter of 2016). If the last trend is sustained and the foreign exchange program works as expected, this should, in our opinion, help to curb inflation pressures down the road and create investment opportunities in local currency debt.

Second, even though the country's fiscal performance is a major challenge (rating agencies have noticed and might punish Mexico for this), the alternative presidential candidate (Andrés Manuel López Obrador also known as AMLO) might be more orthodox than currently perceived.

EM Offer Idiosyncratic Investment Opportunities, Especially Local Currency

We believe the end result of policy orthodoxy and greater political stability in Brazil, Russia, Argentina, and Mexico (to a lesser degree) is the creation of idiosyncratic investment opportunities. Local currency markets, in particular, stand out, given the policy focus on disinflation and lower interest rates at a time when the developed world is bracing itself for higher inflation and exists from policy tightening/quantitative easing and developed market policymakers are actively discussing higher inflation targets.

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Oil Price Drop Not Surprising, Global Demand to Provide Support https://www.vaneck.com/blogs/natural-resources/oil-price-drop-demand-provide-support/ We’re not surprised by this week’s drop in oil prices, given that meaningful profit taking usually follows a strong year of performance as we had in 2016.

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VanEck Blog 3/10/2017 2:27:26 PM

Contributors: Shawn Reynolds, Portfolio Manager, and Charles Cameron, Deputy Portfolio Manager for the Natural Resources Equity Strategy

It has been a tough week for oil prices, with crude oil (West Texas Intermediate) dropping below $50 per barrel for the first time this year. As of the market close on March 9, prices are off 11% YTD after hitting a 12-month high of $56 on January 6. In our view, this selling looks overdone, but has created an interesting buying opportunity for our hard assets investment strategy.

We are not surprised by this week's oil price decline given that markets often experience a period of meaningful profit taking after a strong year of performance as we had in 2016. Memories are short so it may be surprising to recall that oil was $29 per barrel back in January 2016.

The Impetus Behind this Week's Selloff

We do believe, however, that there are some unique technical/macro factors contributing to the recent selloff:

  • The market, in general, has been long crude oil in anticipation of a rebalancing in U.S. inventories. While we anticipate draws soon, many market participants have been exiting their long positions believing that these reductions should already have started.
  • Since mid-December (after the implications of the U.S. presidential election had started to be absorbed), crude oil has been trading in a relatively tight range and price volatility has been at historically low levels. We believe that the market has become overly comfortable with this tighter-than-average oil price range, and we are now reverting to oil's more normal trading pattern.
  • Given that Federal Reserve rate hike expectations have moved up to March, a significant amount of commodity positions have been cut in anticipation of slower growth on the back of higher rates.

Looking ahead, we continue to believe that the "OPEC put" is quite strong (in the $40 range) and that the next commentary out of Saudi Arabia should reflect both increased pressure on current compliance and provide a clear indication that the quota system will be extended for three to six months further.

Demand Remains Remarkably Resilient

Despite recently strong U.S. drilling activity and production, most other macro and industry-wide fundamental indicators continue to suggest that supply imbalances remain ahead. We expect that a continuation of steady demand will easily offset today's short-term oversupply.

Recent events in the market aside, our position for many years has consistently been that oil demand is remarkably resilient unless you have an unforeseen systemic risk event, such as a global recession. We expect neither in 2017. Long term, we see pro-growth policies, fiscal stimulus in the U.S., and support for growth in China as positive drivers. We expect global demand growth to continue at a fairly robust rate, and to provide support for oil prices.

Rising Global Oil Demand
1995 – 2018e

Rising Global Oil Demand 1995 – 2018e

Source: IEA; EIA. Data as of February 28, 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

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Gold's Resilience Strengthens in February https://www.vaneck.com/blogs/gold-and-precious-metals/resilience-strengthens-in-february/ Gold moved through the $1,200 level and showed resilience in February as a number of normally bearish factors failed to weaken prices.

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VanEck Blog 3/10/2017 12:00:00 AM

Gold Responds Strongly to Normally Adverse Conditions

Gold moved through the $1,200 level and showed resilience in February as a number of normally bearish factors failed to weaken prices. Federal Reserve Chair Janet Yellen's mid-February testimony to Congress indicated tighter monetary policies, and subsequent comments from regional Fed presidents reinforced Yellen's hawkish views. This lifted the market odds for a March Fed rate increase and in response the U.S. dollar strengthened considerably, with the U.S. Dollar Index (DXY)1 up 1.9% for the month. The weakness in Chinese and Indian demand for physical gold seen in 2016 continued into the new year, and January Swiss trade statistics showed that exports to both China and India are below last year's levels. In addition, markets in China were closed at the start of the month for the week-long Lunar New Year holiday. At the same time, U.S. equities had a strong month with the Dow Jones Industrials Average (DJIA)2 setting a record of twelve straight days of new all-time highs above 20,000 beginning on February 9. While none of these events would typically be supportive of gold, bullion nonetheless gained $37.68 (3.1%) for the month. In fact, through the end of February, gold is up 8.3% and has outperformed the DJIA by 2.5% in the first two months of 2017.

We attribute the recent resilience of gold to three factors: 1) a new era of geopolitical uncertainty since Brexit; 2) February saw the first significant net inflows to bullion exchange traded products since the November U.S. presidential election; and 3) upticks in inflation have caused a decline in real rates. The February releases of both the U.S. Consumer Price Index (CPI)3 and the Producer Price Index (PPI)4 surprised analysts with their largest monthly jumps in several years. Annual core CPI inflation is now at 2.3%, putting it at the upper bounds of where it has been trending since the 2008-2009 financial crisis.

Lackluster Yearend Reporting Highlighted by Downgrades and Increased Spending

In contrast to bullion, gold stocks lagged in February, as the NYSE Arca Gold Miners Index (GDMNTR)5 fell 3.9% and the MVIS™ Junior Gold Miners Index (MVGDXJTR)6 declined 2.2%; however, January's results have helped to keep the YTD returns strong at 9.2% and 15.3%, respectively. Most gold producers have reported yearend results and given guidance for 2017, but the reporting has been lackluster. Although most producers have met expectations, there have been a few negative surprises that have weighed on their stocks. Additionally, a couple of miners downgraded the quality of their reserves or lowered production forecasts, and a couple of others raised equity. Given higher gold prices, spending is on the upswing. BofA Merrill Lynch expects that North American senior and mid-tier companies will increase total exploration spending by 51% and new project capital by 32% in 2017. While this will reduce cash flow this year, it should pay off with discoveries and developments further down the road.

Gold Stocks Price Movement Not Fundamentally Driven

While these announcements cast a negative tone over the fourth quarter earnings season, they do not explain the significant underperformance of gold stocks relative to bullion. The weakness in gold stocks was exaggerated by the unusual trading on the afternoon of February 27. Gold trended lower beginning around noon that day as Robert Kaplan, President of the Dallas Federal Reserve, made comments supportive of a rate increase, which stimulated U.S. dollar strength. Gold ended the day with a $4.38 (0.3%) loss, reflecting a normal fundamental reaction to the news. In the same afternoon gold stocks reacted as if gold had taken a $30 beating. The VanEck Vectors™ Gold Miners ETF (GDX®)7 fell 5.4% and the VanEck Vectors™ Junior Gold Miners ETF (GDXJ®)8 fell a whopping 9.6%. Trading volume for GDXJ hit a historic daily high while trading volume for the Direxion Junior Gold Miners 3X ETF (JNUG)9 was its second highest on record. The unusual trading and lack of fundamental drivers suggest that technically driven funds received sell signals that induced further stop loss selling. What prompted such sell signals is a mystery, but it has resulted in making stock valuations that were already attractive, dirt cheap. Miners will try to turn that dirt into gold.

Gold Looking for a Price Catalyst in 2017 (and It's Not Likely to be Inflation)

Thus far in 2017, gold has lacked a catalyst that would move the price strongly higher. We believe such a catalyst is likely, but the source and timing are impossible to predict. In the coming months or years, it is our opinion, that a geopolitical, economic, or financial event that motivates investors to seek safe haven10 investments is likely. Given the easy monetary policies globally, recent expectations for growth, and the potential for trade protectionism, we understand those who see inflation as the next gold catalyst. Gold has always reacted strongly to inflation that is out of control. However, while we could be wrong on this, we do not believe that inflation will trend much higher. Much of the increase in inflation over the past twelve months can be attributed to the resurgence in commodities prices from very oversold levels. In our view, the commodities rebound is not likely to further drive inflation in the near term. The popular reflation theme relies on growth and government spending that may not be as strong as expected, as President Trump may face challenges passing his agenda through Congress. Lastly, the Fed seems poised to tighten policies for an extended period, which works against inflation. Until inflation or some other catalyst emerges, we believe that the gold price will follow the usual ups and downs this year but in general terms, will be well supported in 2017.

Substantial Cost Reduction Across Industry Stabilizing

We have just returned from the BMO Capital Markets 26th Annual Global Metals & Mining Conference held in Hollywood, FL, an annual gathering of metals and mining executives, including many gold producers and developers. It is becoming increasingly clear from the yearend reporting results across these mining companies that the substantial decline in mining costs of the past few years is beginning to reach its limits. While we see no mining cost inflation on the horizon, some companies are seeing costs level out. On average, all-in sustaining costs (AISC) for gold companies are now around the $900 per ounce level. Some companies, particularly among the majors, continue to guide for lower costs, which should enable the average to decline further in the next couple of years.

New Crop of Gold Companies Key to Future Growth

In basic terms, one of the most direct ways to create value for shareholders in the gold sector is to discover a piece of real estate in some remote part of the world that can be turned into a gold mine. There is a new crop of emerging producers, many of which we hold in our portfolio, that attracted significant attention at the BMO Conference. These are development companies that were able to advance projects through a very difficult bear market and are now favorably positioned producers in an improving market. Last year we saw Torex Gold Resources,11 Roxgold,12 and Guyana Goldfields13 pour their first gold at new mines in Mexico, Burkina Faso, and Guyana, respectively. What is remarkable is that each of these companies started production on time and on budget. There have been no indications of significant problems with these startups because they have been staffed with excellent talent and have been able to access high-quality engineering and construction teams. Going forward, these companies are now focused on optimization, expansion, and exploration to help grow their businesses.

There are two routes a development company can take: 1) be acquired by a producer, or 2) build a mine. For shareholders, either outcome is attractive provided the mine is successful. Historically most large producers have grown through acquisitions, however acquisitions can be costly because they usually come at a premium. Thus far in this cycle, producers are using a different approach by taking equity stakes in early stage, pre-resource companies that they believe will develop winning properties. Meantime, emerging producers like Torex Gold Resources, Roxgold, and Guyana Goldfields could become the mid-tiers and majors of tomorrow. This year we expect to see TMAC Resources14 and Pretium Resources15 start production at properties in Nunavut and British Columbia, respectively. Next year comes Gold Road Resources16 in Australia and Continental Gold17 in Colombia. Beyond that we are excited about companies like Sabina Gold & Silver,18 Osisko Mining,19 and Integra Gold.20 As we expect production among the majors to stagnate or decline in coming years, these new emerging companies are helping to revitalize the sector. If the major's current growth strategy does not pay off, these young companies could become the acquisition targets of the future.

Download Commentary PDF with Fund specific information and performance

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Argentina Rejoins Index and Boosts Yield https://www.vaneck.com/blogs/emerging-markets-bonds/argentina-rejoins-index-boosts-yield/ Argentine peso denominated bonds were added to the J.P. Morgan suite of GBI-EM indices on February 28, which boosted yields and diversification.

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VanEck Blog 3/9/2017 12:00:00 AM

In a somewhat accelerated fashion, Argentina recently became eligible for inclusion in the J.P. Morgan suite of GBI-EM indices. This follows a series of measures that have been implemented to facilitate foreign investor access to local government bond and currency markets. As a result, several Argentine peso (ARS) denominated bonds were added to the J.P. Morgan suite of GBI-EM indices on February 28. The eye-popping aspect of the ARS bonds is their high yields, which are yielding between 13.4% and 14.4% as of February 28. Argentina now represents approximately 3% of the GBI-EM Global Core Index (GBIEMCOR), and the net effect of its addition was more than 20 basis point boost in the overall yield of the Index to 6.75%.

Argentina Debt Boasts Substantial Yields
10-Year Local Currency Sovereign Bond Yields (%) As of 2/28/2017

Argentina Debt Boasts Substantial Yields Chart

Source: FactSet as of 2/28/2017. All performance quoted represents past performance. Past performance is no guarantee of future results.

Argentina's Low Correlation May Provide Portfolio Diversification

A more interesting aspect of the ARS inclusion may be the effect of the political and economic dynamics of Argentina on the country's foreign exchange rate. In short, since the ARS was liberalized at the end of 2015, it has exhibited an extremely low correlation to the J.P. Morgan GBI-EM Global Core Index, coming in at 0.07 for the 14 months ending February 28, 2017 – making it attractive from a diversification standpoint. It is likely, however, that by its very inclusion in the GBI-EM indices, the consequential impact on flows may increase the ARS correlation. However other currencies which are excluded from the tradeable and most benchmarked indices, such as the Indian rupee (INR) and the Chinese yuan (CNY), have shown much higher correlations than the ARS, as shown below (0.54 and 0.52 versus the GBI-EM Global Core Index).

We expect that Argentina's net effect on the J.P. Morgan investable benchmarks to be, as a consequence, both additional yield and greater diversification.

Currency Correlations
January 1, 2016 – February 28, 2017

Currency Correlations Table

Frequency: Daily. ARS - Argentine peso, BRL – Brazilian real, MXN – Mexican peso, RUB – Russian ruble, PLN – Polish zloty, DXY – U.S. Dollar Index, INR – Indian rupee, CNY – Chinese yuan. GBIEMCOR represents the J.P. Morgan GBI-EM Global Core Index, which is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer.

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The Evolution of Electric Vehicle Batteries: Part 1 https://www.vaneck.com/blogs/natural-resources/evolution-electric-vehicle-batteries-part-1/ Our long-term view on the EV industry is positive. The technology is evolving rapidly, and the competitive landscape is conducive to developing efficient, low-cost, yet powerful batteries.

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VanEck Blog 3/7/2017 12:00:00 AM

This is part one of a two-part series by Ms. Zhang that explores the economics of electric vehicle (EV) batteries, which are rapidly developing, arguably at a quicker pace than stationary battery storage. Zhang follows last year's two-part blog series on the necessity of battery storage as a crucial element of widespread solar electricity adoption (read Alternative Energy: A Transformative Storage Boom? Part 1 and Part 2).

Overview: A New Paradigm

While it is virtually impossible to define the exact inflection point at which EV technology and cost will make sense and usher in a new paradigm, history shows with prior technology adoption rates that an "s-curve" is the likely pattern. It took TVs and smartphones 5 to 10 years to go from 5% to 50% adoption in the U.S. – although rates vary country-by-country depending on infrastructure and pace of growth. The pace of EV cost cuts, research and development (R&D) support in new tech development, and broad global support for EV augur well for electrification in the coming decades. We believe that we are not far from what is likely to be a sustainably profitable industry.

Here we present the key takeaways from our 4Q 2016 trip to Asia, which included meetings and facility tours with some of the leaders in the battery vertical. Our travels took us to Shenzhen and Shanghai, China, and Seoul, South Korea to meet the incumbents in the battery and electric vehicle space. We met management from battery manufacturers Samsung SDI and GS Yuasa, electric vehicle developers BYD, Hyundai, and NextEV, solar project and equipment manufacturer Canadian Solar, toured the battery and car manufacturing facilities of BYD and the auto assembly line of Hyundai.1

Tesla Model S Unleashed a Surge in EV Interest

Interest in EV batteries has surged since the introduction of Tesla's second vehicle in 2012, the Model S luxury sedan, which was the world's best-selling electric car for two years in a row, 2015 and 2016.2 The growing interest in EV has compelled us to better understand the pace of technological development and cost structures of the major component providers and competitors in the East, where peer competition is intense and government support resilient. Our long-term view on the EV industry is very positive. We believe that technology is evolving rapidly and see the global competitive landscape as highly conducive to developing efficient, low cost, yet powerful batteries. In the near term, however, electric battery manufacturing and development is largely unprofitable and relies on government subsidies ― a dependency that is volatile and unsustainable.

Evolving the Technology and Process to Reduce Costs

For the EV battery industry to become a compelling investment, we believe that permanent steps in cost reduction are paramount and necessary. The companies we met with in 4Q 2016 were unanimously in agreement in expanding capacity multifold from current levels by 2020, scaling manufacturing, and subsequently reducing the cost/kWh (cost per kilowatt hour) in tandem with technological improvements. In 2011, the cost of a battery pack was $550/kWh, and since then it has more than halved. However, despite the race to achieve lower prices while improving energy density (defined as the amount of energy stored per unit volume), different manufacturers can have highly variant cost structures depending on their manufacturing process. For example, BMW's battery pack costs between ~$200-$300/kWh while Tesla's Model S pack is ~$190/kWh, largely due to Tesla's in-house packaging.

We are in the early stages of technological development, and if you take a closer look at manufacturing costs, materials that comprise the battery cell (cathode, anode, electrolyte, separator, and container) represent just 25% of total battery cell costs. As the technology improves, we would expect a sizable reduction in the 25% "abnormal" category of costs, which are comprised of discarded batteries and impaired assets spread over the cost per cell.

Chart A: EV Battery Cell Cost Breakdown 2015

Chart A: EV Battery Cell Cost Breakdown 2015

*Loss from discarded batteries, asset impairment, etc.
Source: BofA Merrill Lynch Global Research estimates.

Not All Batteries Are Created Equal: Cylindrical, Prismatic, and Polymer

Not all batteries are created equal, and there are three major types of cells: cylindrical, prismatic, and polymer. Each is designed very differently both in shape and chemistry, despite similar functions as lithium-ion batteries. Tesla,3 in particular, uses the cylindrical cell with NCA (Nickel-Cobalt-Aluminum oxide) chemistry. Despite its competitive cost basis on the overall cell level, we believe it will be outpaced in cost reductions by the Chinese polymer cell with LFP (Lithium-Iron-Phosphate) chemistry, and the Korean original equipment manufacturers' (OEMs) prismatic chemistries, which use NMC (Nickel-Manganese-Cobalt oxide) chemistry.

Chart B: A Comparison of Lithium-Ion Battery Form Factors

Chart B: A Comparison of Lithium-Ion Battery Form Factors

Source: Johnson Matthey Battery Systems, Bernstein Analysis. For illustrative purposes only.

You may wonder why certain OEMs choose different chemistries and form factors. Which one will "win" in the end? Simply put, a successful battery demands three key requirements: 1. A life cycle specification of at least 3,500 cycles (~10 years of use with daily charge and discharge); 2. Be cost-effective, measured by both cost of ownership and upfront capital cost; and 3. Safety (e.g., not the Galaxy 7 debacle). Tesla is currently partnering with Panasonic to manufacture the NCA battery, but they are currently the only players in the market to do so. Tesla's current cost competitiveness resides in the massive economies of scale achieved at the Tesla Gigafactory, a Nevada-based manufacturing facility with production levels its European and Asian peers have not met. However, it remains to be seen if Tesla can maintain its cost advantage, since both NMC and LFP cells satisfy requirements 1. and 3., while 2. is still working its way down on the cost curve, as shown below in Chart C. One recent innovative development with this configuration has been the evolution of the ratio of NMC from 1:1:1 to 6:2:2 and 8:1:1, which greatly improves energy density and cost. This process is difficult, however, as nickel is also highly reactive and working with it is difficult.

Chart C: EV Battery Pack Prices Are Coming Down
2012-2035e

Chart C: EV Battery Pack Prices Are Coming Down

Source: Bernstein estimates and analysis.

At this current point in time, auto OEMs are placing bets on their technology of choice and working with their respective battery manufacturers in further developing a cell that would surpass its competitors in safety and power at the lowest cost.

Part 2 in this EV series will look at how regulatory policy is on the side of electric vehicles, and how we believe that the adoption of electrification will be an inevitability.

The Evolution of Electric Vehicle Batteries: Part 2

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Municipal Bond Market Opportunities in 2017 https://www.vaneck.com/blogs/muni-nation/municipal-bond-market-opportunities-in-2017/ In this timely video, Jim Colby, Portfolio Manager, discusses his outlook for the municipal bond market in 2017 including potential opportunities and uncertainties.

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VanEck Blog 3/7/2017 12:00:00 AM

Muni markets appear to be returning to traditional patterns after the volatility that characterized the post-election period at yearend 2016. Jim Colby discusses his outlook for 2017, highlighting potential opportunities and touching on two of the biggest uncertainties at the moment: refundings of existing bonds and tax reform.

Watch Video Municipal Bond Market Opportunities in 2017

Jim Colby, Portfolio Manager, discusses opportunities in the municipal bond market in 2017.

Watch Now | Video Transcript

VIDEO TRANSCRIPT:

TOM BUTCHER: What's your outlook for municipals for the rest of the year?

JIM COLBY: I think we're past the extreme volatility of the end of last year. Investors have returned to the muni market, and it looks like traditional patterns will persist. This means that returns should be positive, perhaps through the first quarter and into the second. We expect refundings of existing bonds to be an important factor in whether returns will be positive or negative. And of course, interest rates will dictate whether those refundings happen and, as a result, whether we end up with positive returns.

BUTCHER: What do you see as the greatest uncertainties at the moment and going forward?

COLBY: I see two. One is refundings and the other is tax reform, which was at the heart of the market’s move in November and December.

Whether some type of tax reform can take place in the next 90 or 100 days is certainly open to question. The potential for a change in corporate and individual tax rates is a big wild card. And if interest rates remain relatively stable in the current low-rate environment, there could be plenty of refundings — which would add to muni supply — even if the Fed raises the Fed funds rate in March or May by 25 or 50 basis points. This creates some balance between inflows and the supply-demand equation and augurs well for muni performance through the first half of the year.

BUTCHER: The last time tax rates fell was during Ronald Reagan's presidency, and the muni market had quite a time adjusting. Will it suffer the same fate or have as much difficulty adjusting this time around?

COLBY: Reaganomics introduced the notion that a significant change in the tax code could occur, and it did occur: Tax rates for the highest marginal tax bracket came down during his administration to 28% from 50%. To some degree, there is a parallel to what we could experience in the coming months.

A reasonable thought is that lower tax rates mean less demand for the tax exemption that municipals offer. But throughout the 1980s, there was considerable growth in municipal tax-exempt money market funds and municipal tax-exempt bond funds. Assets in the muni space increased significantly, from about $300 billion under management to $1 trillion.

The question is whether the same jump in demand will occur this time. While we don't yet know the answer, the experience of the Reagan era shows that munis cannot only survive, but also flourish in a lower-tax environment.

BUTCHER: Where do you see opportunities?

COLBY: There are good stories to tell in the investment-grade and high-yield parts of the market. The main advantage of municipal high-yield compared to other asset classes these days continues to be that nominal municipal yields are higher than those found in corporate high-yield. Corporate high-yield has had a terrific run in the past two or three months due to great demand, which has brought corporate yields down. But municipal high-yield has lagged somewhat, giving it the slight advantage.

Post Disclosure

The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about VanEck Funds, VanEck Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.

Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Funds’ income will be exempt from federal or state income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Gains, if any, are subject to gains tax.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333. Please read the prospectus and summary prospectus carefully before investing.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © Van Eck Securities Corporation.

Van Eck Securities Corporation, Distributor
666 Third Avenue, New York, NY 10017

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Follow the Flows: Active versus Passive https://www.vaneck.com/blogs/moat-investing/follow-the-flows-active-passive/ VanEck Blog 3/2/2017 12:00:00 AM

The active versus passive debate rages on. Proponents of passive investing, or index investing, tout its lower relative costs and in some cases, increased liquidity and tax advantages. On the flip slide, active investors tend to believe it is worth paying a premium for rigorous investment analyses that may potentially drive outperformance over time and allow an active manager to adjust a portfolio in extreme market conditions.

Regardless of your position in this debate, the trend is clear. In the U.S. fund market, over the last three years more assets have been invested in passively managed mutual funds and exchange-traded funds (ETFs) than actively managed versions of the same, a lot more. For the three year period ending January 31, 2017, passively managed funds have attracted over $1.4 trillion of new assets according to Morningstar. In that same period, actively managed funds have experienced net outflows of $475 billion.

Passive Preference Not as Significant for International Equities

U.S. equity funds have led the active to passive trend. Actively managed U.S. equity funds have seen over $500 billion redeemed over the last three years while nearly $600 billion has been allocated to passively managed funds as of January 31, 2017, according to Morningstar. Possible drivers of this trend:

  1. It has arguably become more difficult to outperform U.S. equity benchmarks.
  2. Many passively-managed U.S. equity funds are now inexpensive.

Although recent flows into passively managed international equity funds have outpaced actively managed funds, the net flows "gap" isn't yet as wide as U.S. equity funds indicating that investors may see the value of active management in markets outside of the U.S. The logic: in markets with more political and regulatory unknowns and less access to information, active managers may have more success versus broad benchmarks.

U.S. Mutual Fund and ETF Estimated Net Flow (billions)
Three Years Ending January 31, 2017

U.S. Mutual Fund and ETF Estimated Net Flow

Source: Morningstar. Data includes U.S. domiciled mutual funds and ETFs and excludes funds of funds and leveraged and inverse funds.

Rules Based Investing that Taps into Morningstar's Equity Research

Despite the perceived challenges facing U.S. equity funds, the VanEck Vectors Morningstar Wide Moat ETF (MOAT) and its underlying benchmark index, the Morningstar® Wide Moat Focus Index℠, have established a track record that speaks for itself.

Internationally, VanEck Vectors Morningstar International Moat ETF (MOTI) provides an extension of the Morningstar research offered for domestic stocks by MOAT. MOTI offers investors many of the benefits of passive index investing while tapping into Morningstar's dynamic equity research. MOTI seeks to track the Morningstar® Global ex-US Moat Focus Index℠ (the "Index"). The Index employs a rules based methodology that seeks to represent high quality international companies that are attractively priced.

The rules-based Index is reviewed quarterly allowing it to systematically reflect Morningstar's most recent assessment of a company's quality while adjusting its exposure based on valuation dynamics in the market. Additionally, MOTI's net expense ratio of 0.56%1 is lower than its Morningstar US Funds Large Value Category average of 1.21%2.

Click here to view MOAT holdings and learn more about moat investing

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Emerging Markets Bonds Boosted by Pause in Reflation Trade https://www.vaneck.com/blogs/emerging-markets-bonds/boosted-by-pause-in-reflation-trade/ U.S. rates backed off recent highs and the U.S. dollar strength subsided, supporting all major sectors of emerging markets bonds in January.

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VanEck Blog 2/23/2017 9:27:35 AM

Positive Macro Economic News

January was marked by a fairly consistent stream of positive macro indicators that provided support to the global reflation story. In both the U.S. and Europe, inflation readings and expectations have risen and are now at or above 2%, indicating that economies are strengthening. U.S. production figures have been generally strong (and so have China's) and employment figures, though not overwhelmingly positive, have been decent. In commodities, crude oil prices rose into the mid-$50s per barrel. The oil market appears to believe that OPEC (Organization of the Petroleum Exporting Countries) countries will live up to their production promises, although it will be interesting to see how U.S. shale producers react to the higher prices.

U.S. Rates Remain Range Bound

Government yields in Europe climbed significantly over the month, with 10-year French and German bond yields increasing 51% and 115%, respectively (ending the month at 1.03% and 0.43%) On the other hand, U.S. 10-year bond yields finished the month approximately where they began, and generally remained below 2.50%. After forcing rates higher in the weeks after the November election, perhaps the market is waiting for signs that President Trump can achieve the pro-growth tax reforms and fiscal programs promised during his campaign. Interestingly, infrastructure spending has not received much attention in the new administration's busy first weeks and was not even mentioned in President Trump's inaugural speech.

As expected, the Federal Reserve (Fed) did not raise interest rates at its January meeting but did not back off from the notion that normalization is likely. The continuation of positive U.S. economic growth readings will likely support expectations of another 25 basis points rate hike at the Fed's June meeting, or possibly before. Although expectations are for two or three hikes this year, a couple of dynamics bear watching. First, will Trump stand by quietly as Fed Chair Janet Yellen -- who he has criticized previously for keeping rates low for political reasons -- tightens rates, which could dampen growth and help further strengthen the U.S. dollar? Second, what will the Fed do with its massive MBS (mortgage-backed securities) and Treasury portfolios, and what will the impact be on market yields if it stops reinvesting principal payments?

Reflation Trend Favors High Yield

Global growth and higher global demand are usually positive for emerging markets, even though they may push yields and the U.S. dollar higher. Perhaps reflecting this expectation, emerging markets corporate bonds, particularly high yield, continued to perform well in January. High yield emerging markets corporates returned 1.87%, outperforming U.S. high yield by 0.53% and providing a spread pick-up (in option-adjusted terms) of 90 basis points. We believe investors may continue to find emerging markets high yield corporate bonds attractive, particularly given the additional carry the sector provides which can act as a cushion against rising rates. Hard currency sovereign bonds returned 1.4% in January, also driven by spread tightening. With reflation expectations generally driving credit spreads tighter, investment grade emerging markets sovereign bonds continue to appear attractive on a relative value basis, offering a 69 basis points yield pickup versus investment grade U.S. corporates.

Strong Month for Local Currency Bonds

In local currency markets, sovereign bonds had a strong month, returning 2.25% in U.S. dollar terms, with approximately equal contributions from local rates and currencies, though some currencies lagged. The Turkish lira has struggled given the country's increasing political risk, weak growth, and high inflation. The Mexican peso remained under pressure from Trump's tough talk on trade and immigration, although it did recover somewhat in the second half of January. The U.S. dollar's reversal in recent weeks, following its strong post-election rally, may persist if the Trump administration continues to talk down the dollar. On the other hand, the dollar may find support if economic readings pointing to stronger U.S. growth and inflation continue.

Argentina Added to Local Bond Indices

Positive reforms in countries like Brazil and Colombia have helped boost returns for many Latin American bond investors over the past year. Argentina has also stood out for its aggressive agenda since President Mauricio Macri took office in late 2015 to transition away from Kirchner-era policies. Macri's agenda includes fiscal, currency, and tax-related reforms, as well as an agreement with bondholders last year to end a dispute following Argentina's default in 2001 (which caused its removal from global bond indices). This agreement allowed Argentina to tap the global debt markets last year, and the country issued an additional $7 billion in bonds in January. Following reforms that have opened its local bond and currency markets back up to local investors, Argentina will be added back to the J.P. Morgan GBI-EM suite of indices, including a 3% weight in the J.P Morgan GBI-EM Global Core Index, at the end of February. The addition will have a slightly positive impact on the Global Core Index's yield, which ended January with a 6.59% weighted-average yield to maturity, as shown below.

Yield to Maturity (%)
January 2012 – January 2017

Yield to Maturity (%) Chart

Source: FactSet as of 1/31/2017. All performance quoted represents past performance. Past performance is no guarantee of future results. Not representative of fund or fund indexes. Indexes are unmanaged and are not securities in which an investment can be made. Please see definitions below.

 

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Private Education is Growing in Emerging Markets https://www.vaneck.com/blogs/emerging-markets-equity/private-education-growing-industry/ Given its rapid growth, private education in emerging markets provides what we believe is an exciting investment opportunity.

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VanEck Blog 2/23/2017 12:00:00 AM

An Exciting Investment Opportunity

Given its rapid growth, private education in emerging markets countries provides what we believe is an exciting investment opportunity. The industry is being energized by the twin growth engines of expanding middle classes and rising populations: 90% of future global population expansion is expected to come from emerging markets countries.1 Today, 82% of students are from emerging markets countries, according to research from BofA Merrill Lynch.2

Economic Growth Propels Rising Education Standards

Private education may be a small sector in emerging markets but it is growing rapidly. Economies of emerging markets countries are developing quickly and their middle classes are expanding. With this comes the desire of parents to provide children with the best possible educational opportunities. But the quality of public education varies greatly across the emerging markets universe. Many countries in Africa are positioned toward the low end of this spectrum;3 South Africa is a good example, and we explore its situation below. In addition, there is growing demand for after-school education, tutoring, and test preparation, particularly among Asian countries. As a result, the demand for private education companies continues to grow, in size, importance, and number.

A Case Study: South Africa

Primary and Secondary Education

South Africa is a compelling emerging markets case study. Compared to other emerging markets, South Africa spends a significant amount on education (6% of GDP), yet public education outcomes are poor. (By contrast, Russia, China, and India spend about 4% of GDP; by comparison, the U.S. spends 5%).4 In recent years, South Africa's pupil-to-teacher ratio has risen and pass rates have worsened. Yet public primary and secondary schools in South Africa still educate 96% of all pupils.5 Private education companies account for the remaining 4%, and have yearly been ramping up the construction and expansion of schools. While the number of students enrolled in South African private schools has grown from 366,000 in 2008 to 566,000 in 2015 (a 55% increase),6 it is still far outweighed by the more than 12 million pupils enrolled in public schools.7 But the need is extreme, given that South Africa ranked 138 out of 140 on the quality of it education system as shown in the table below.

South African Private School Enrollment is on the Rise
2000-2015

 

Source: Curro Holdings. 

South Africa's Education System Scores on the Low End of Quality

Quality of Education
System
Country Rank out of 140
Switzerland 1
U.S. 18
Kenya 36
Zimbabwe 42
India 43
China 56
Russia 82
Mexico 117
Nigeria 125
Brazil 132
South Africa 138
Source: World Economic Forum (2015-16).

South African private schools are able to attract good teachers, provide top quality facilities and materials, and their education outcomes are far higher than those in public schools. Given the obvious need for private education in South Africa, we have spent the last several years extensively researching the two publicly listed education companies in South Africa: Curro Holdings8 and ADvTECH Limited.9 Historically, the schools of both companies catered to the higher income segment of the population. Recently, Curro has developed a more affordable private school option that still delivers excellent academics, but has slightly larger class sizes and fewer extracurricular and sports activities that drive up tuition costs. The result is that private education is increasingly becoming an option for middle class households, as Curro schools' tuition fees range from ZAR12,000 per annum to over ZAR84,000 per annum.10 Curro has ambitious expansion targets, including increasing its student enrollments by roughly 20% per annum through 2020.11 ADvTECH is also expanding its school capacity.12

Tertiary Education

Tertiary education in South Africa also affords an opportunity to private education companies. Currently, all universities in South Africa are public and, with the number of students increasing, they have neither the money nor capacity to cope. As a result, a number of private colleges have sprung up that offer accredited degree programs. These have been growing in popularity. ADvTECH is the leader in this area, owning a number of colleges and also having significant expansion plans.13

South Africa Offers a Tertiary Education Opportunity
% of 25-65 Year Olds with Tertiary Education

 

Source: OECD, BofA Merrill Lynch. Data as of 2015. 

China and Brazil in Brief

What South Africa demonstrates is that private sector education companies can increasingly offer solutions that governments either do not have the money or the ability to provide. We see a growing role for private education across many emerging markets countries. In China, for example, there are numerous publicly listed education companies that offer tutoring services, distance education, test preparation, and private schooling. One trend in China is the increasing number of internationally accredited schools. One listed company, China Maple Leaf Educational Systems14 operates schools based on the Canadian province of British Columbia's education system, and its high schools are certified by British Columbia. Brazil also has several publicly listed education companies. Like these, we expect many more education companies to form, grow, and eventually list on stock exchanges across the emerging markets.

Private Education is a Growing Emerging Markets Trend

The trend of growing middle classes in emerging markets countries is here to stay. In addition, they have generally young populations and favorable demographics. According to Euromonitor, private education spending is expected to grow by 4% per annum worldwide, and in fast-growing markets like China and India, growth is expected to exceed 6% per annum.15 These trends show that the size and importance of private education industry is expected to grow for years to come, and is ripe for potential investment opportunity.


For a complete listing of the holdings in VanEck Emerging Markets Fund (GBFAX) as of 1/31/16, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

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The Tax Equivalent Yield Advantage of Municipal Bonds: A Closer Look https://www.vaneck.com/blogs/muni-nation/tax-equivalent-yield-municipal-bonds/ Ordinary relationships between risk and yield have, for the time being, been turned upside-down.

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VanEck Blog 2/22/2017 12:00:00 AM

Investment Grade and High Yield Municipal Bonds Stand Out

It's a strange time indeed to be a fixed income investor. Ordinary relationships between risk and yield have, for the time being, been turned upside-down. Normally, it's the riskiest assets that command the highest yields, while lower risk bonds offer lower yields. But today, investment grade and high yield municipal bonds stand out in the current environment, both nominally and from a tax-equivalent perspective, even when compared to riskier options.

As the chart below illustrates, investment grade municipal bonds have become nominally (shown in dark blue in the chart) attractive, offering higher yields to investors than U.S. and global government bonds. While investment grade muni bonds are nominally competitive compared to other investment grade fixed income assets, high yield muni bonds are currently in an even more favorable position, offering nominal yields that outstrip traditionally riskier assets, including high yield emerging market bonds and high yield corporate bonds.

Comparative Index Yields
As of February 16, 2017

Comparative Index Yields Chart

Source: Bloomberg Barclays. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

This abnormal situation was spurred in large part by the large sell-off in muni bonds, both high yield and investment grade, following the surprise election of Donald Trump in November 2016. As muni bond prices dropped, their yields rose. Somewhat puzzlingly, corporate high yield bonds proved much more resilient throughout the muni bond selloff, and consequently have not seen their yields rise to the same extent.

An Inversion of the Norm

Although investment grade muni bonds and their high yielding muni bond cousins are nominally (again, in dark blue) providing more competitive yields than other investment grade bonds and high yield bonds, respectively, their yield advantage comes into even sharper focus when tax-equivalent yields (illustrated by other colors in the chart) are calculated. Tax-equivalent yields take into account the federally tax-free coupon that municipal bonds offer, as well as the tax bracket of a given investor. As the chart clearly shows, when investment grade muni bonds' tax-free coupons are taken into account, their yields approach those of emerging market corporate bonds, even though emerging market corporate bonds tend to be riskier.

In a clear inversion of the norm, where riskier assets usually offer higher yields, high yield muni bonds are currently offering significantly higher tax-equivalent yields than nominal yields of U.S. corporate high yield bonds and global high yield bonds. This situation should be particularly notable for investors looking for higher yield in risky assets such as emerging markets high yield bonds or high yield corporate bonds—they can currently tap into the same nominal yield from an asset class that has displayed less risk in the form of muni bonds.

Although tax-equivalent yields will vary depending on a given individual's federal tax bracket, they provide an after-tax boost to nominal yields regardless the income level. By taking taxation into account, it's clear that currently muni bond investors may be able to "have their cake and eat it too"—higher yields with lower risk (as measured by historical default rates1). It's uncertain how long this situation will persist, however in the short term these higher yields with relatively low historical risk present enticing buying opportunities for fixed income investors.

Looking forward, it's well known that the Trump Administration has expressed a desire to lower tax rates. If these tax cuts come to pass, the effect these new policies may have on bond yields largely depends on whether the tax cuts actually have the intended stimulating effect on the economy. Muni bonds, with their tax free coupon, may become slightly less attractive if tax rates are lower, but would continue to provide tax exempt income. If the economy grows at a higher rate as a result of lower tax rates, this could prove inflationary, driving rates up, including bond yields. This Administration's proposed infrastructure spending could likewise drive bond yields upward, as yields would need to rise in order to clear excess supply.

1 Source: Moody's Investors Services; "U.S. Municipal Bond Defaults and Recoveries, 1970-2015".

Global Agg: Bloomberg Barclays Global Aggregate Bond Index includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities. U.S. Treasury: Bloomberg Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury. Inv. Grade Muni: Bloomberg Barclays Municipal Bond Index includes investment-grade tax-exempt debt. U.S. Agg: Bloomberg Barclays U.S. Aggregate Bond Index includes government and corporate securities, mortgage pass-through securities, and asset-backed securities. U.S. Corp: Bloomberg Barclays Corporate Bond Index includes taxable corporate debt from U.S. issuers. EM USD Corp: Bloomberg Barclays EM USD Corporate Bond Index includes USD denominated debt from corporate emerging markets issuers. EM Sov Local: Bloomberg Barclays EM Local Currency Government Bond Index includes local currency denominated government debt from emerging markets issuers. EM Sov USD: Bloomberg Barclays EM USD Government Bond Index includes USD denominated government debt from emerging markets issuers. Global High Yield: Bloomberg Barclays Global High Yield Bond Index includes hard currency denominated government, agency and corporate debt from global issuers. U.S. Corp High Yield: Bloomberg Barclays U.S. Corporate High-Yield Bond Index includes below investment-grade corporate debt from U.S. issuers. Muni High Yield: Bloomberg Barclays Municipal High Yield Bond Index includes below investment-grade tax-exempt bond market.

Taxable-equivalent yield represents the yield a taxable bond would have to earn in order to match–after federal taxes–the yield available on a tax-exempt municipal bond (excluding AMT). Municipal bonds may be subject to state and local taxes as well as to federal taxes on gains and may be subject to alternative minimum tax. The chart displays the yields of the Barclays Municipal Bond Index and the Barclays High Yield Municipal Bond Index on a tax-equivalent yield basis and compares such yields to other asset classes as represented by the indexes described above. Fixed income investments have interest rate risk, which refers to the risk that bond prices generally fall as interest rates rise and vice versa. Only U.S. government bonds are guaranteed by the full faith and credit of the United States government. All other 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. Other securities listed are subject to federal, state and local taxes. Prices of bonds change in response to factors such as interest rates and issuer's credit worthiness, among others.

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Bullish Evidence But Bearish Feelings https://www.vaneck.com/blogs/allocation/bullish-but-bearish-feelings/ Although the weight-of-the-evidence remains bullish, NDR’s macroeconomic and fundamental indicator composite became decidedly less optimistic as investor sentiment turned bearish in January.

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VanEck Blog 2/15/2017 12:00:00 AM VanEck NDR Managed Allocation Fund

VanEck NDR Managed Allocation Fund (NDRMX) tactically adjusts its asset class exposures across global stocks, U.S. fixed income, and cash using an objective investment process driven by more than 130 macroeconomic, fundamental, and technical indicators developed by Ned Davis Research (NDR). The following commentary briefly explores recent Fund performance, current allocation, and the weight-of-the-evidence that are covered in more detail here.

Weight-of-the-Evidence Continues to Point to Global Stocks

Although the weight-of-the-evidence remains bullish, NDR's macroeconomic and fundamental indicator composite became decidedly less optimistic as investor sentiment turned bearish in January (see chart below). In response, VanEck NDR Managed Allocation Fund's (NDRMX) overweight position in global stocks was reduced from 85.6% as of January 1 to 81.7% as of February 1. At the same time, the Fund's bond exposure increased from 9.8% to 17.8%, and its 4.1% cash allocation was removed.

The "Trump bump" continued in January as stocks posted impressive returns, with the Dow Jones Industrial Average breaking through the much anticipated psychological barrier of 20,000. For most of the month, the market continued to cheer the prospects of lower taxes, infrastructure spending, and less regulation, but some doubts as to the successful implementation of these promises set in by month end. In January, the segments of equity markets which had been post-election laggards caught up and outperformed; thus we saw the reversal in which global stocks, large-caps, and growth outperformed their U.S. stocks, small-cap, and value counterparts.

January 2017 Performance Review

Equity markets turning negative in the final three trading days of January, and until then VanEck NDR Managed Allocation Fund (NDRMX) had been outperforming; however, for the full month, the Fund returned 1.19% for the month versus 1.73% for its benchmark of 60% stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index). Although the Fund benefited from its overweight allocation to global stocks in January, its emphasis in U.S. small-cap versus large-cap equities, and value versus growth, dampened results. On a since inception (5/11/16) basis, the Fund continues to outperform its benchmark,1 with a return of 6.52% return versus 5.68%.

Total Returns (%) as of January 31, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.19 6.52
Class A: Maximum 5.75% load -4.61 -0.41
60% MSCI ACWI/
40% Bloomberg US Agg.1
1.73 5.68

Total Returns (%) as of December 31, 2016
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.44 5.27
Class A: Maximum 5.75% load -4.39 -0.77
60% MSCI ACWI/
40% Bloomberg US Agg.1
1.38 3.88

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at net asset value (NAV). Index returns assume that dividends of the Index constituents in the Index have been reinvested.

Returns less than a year are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.34%.
Expenses are capped contractually until 05/01/18 at 1.15% for Class A. Caps exclude certain expenses, such as interest.

Fund Positioning February 2017

At this writing, VanEck NDR Managed Allocation Fund (NDRMX) is 81.7% in global stocks, 17.8% in bonds, and 0.5% in cash. In terms of its regional allocation, the Fund increased its exposure to Pacific ex Japan, Europe ex U.K., the Emerging Markets, and the U.K., while reducing its exposure to the U.S., Japan, and eliminating exposure to Canada. In terms of U.S. equities positioning, the Fund increased its exposure to growth and large-cap, while reducing exposure to value and small-cap.

Fund Positioning February 2017 Chart

Source: VanEck. Data as of February 1, 2017.

Weight-of-the-Evidence: Investor Sentiment Turned Bearish in January

Studying investor sentiment is a big component of NDR's research. In fact, there are nine "rules" that govern their research philosophy. Two of these rules are "Don't Fight the Tape" and "Be Wary of the Crowds at the Extremes." You may notice that these two rules speak directly to investor behavior and appear to be in conflict. "Don't Fight the Tape" involves investing along with the herd; this is the nature of trend following. To beat the herd, however, you must inevitably, at times, be positioned as a contrarian, especially when sentiment reaches extreme positive or negative levels.

Sentiment indicators are designed to measure the short-term psychology of investors. This is done by measuring both what people say they are doing (surveys) and what people are actually doing (market indicators). Using surveys to measure investor sentiment is like political polling; the goal is to sample investors to understand their feelings on investing. Market indicators give another important perspective on sentiment because they provide insight into how investors are actually positioning their portfolios. These indicators include such things as a put-to-call ratios, implied volatility, and fund flows.

This chart is a composite, or an aggregation, of sentiment indicators used by NDR. It shows that sentiment became extremely optimistic in late November (a warning sign that stocks may be overbought) and then began to revert towards normal levels in January (sentiment is reversing which is a signal to reduce exposure).

NDR Daily Trading Sentiment Composite
January 2016 – January 2017

NDR Daily Trading Sentiment Composite Chart

Source: Ned Davis Research. Data as of January 31, 2017.
Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

Additional Resources

IMPORTANT DISCLOSURE

1The Fund's benchmark is a blended index consisting of 60% MSCI All Country World Index (ACWI) and 40% Bloomberg Barclays US Aggregate Bond Index. The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries and covers approximately 85% of the global investable equity opportunity set. The MSCI benchmark is a gross return index which reinvests as much as possible of a company's gross dividend distributions. The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.

Global stocks are measured by the MSCI ACWI and U.S. bonds are measured by the Bloomberg Barclays US Aggregate Bond Index. Large-cap stocks are measured by the Russell 1000 Index, an index of the largest 1,000 companies in the Russell 3000 Index. The Russell 1000 Index comprises over 90% of the total market capitalization of all listed U.S. stocks. Small-cap stocks are measured by the Russell 2000 Index, an index which measures the performance of the smallest 2,000 companies within the Russell 3000 Index. Value stocks are measured by the Russell 3000 Value Index, a market capitalization weighted equity index based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform. Included in the Russell 3000 Value Index are stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates. Growth stocks are measured by the Russell 3000 Growth Index, a market capitalization weighted index based on the Russell 3000 index. The Russell 3000 Growth Index includes companies that display signs of above average growth. Companies within the Russell 3000 that exhibit higher price-to-book and forecasted earnings are used to form the Russell 3000 Growth Index. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index's performance is not illustrative of the Fund's performance. Indices are not securities in which investments can be made.

You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program rather than a complete program. All mutual funds are subject to market risk, including possible loss of principal. Because the Fund is a "fund-of-funds," an investor will indirectly bear the principal risks of the exchange traded products in which it invests, including but not limited to, risks associated with smaller companies, foreign securities, emerging markets, debt securities, commodities, and derivatives. The Fund will bear its share of the fees and expenses of the exchange-traded products. Consequently, an investment in the Fund entails more direct and indirect expenses than a direct investment in an exchange-traded product. Because the Fund invests in exchange-traded products, it is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an exchange-traded product's shares may be higher or lower than the value of its underlying assets, there may be a lack of liquidity in the shares of the exchange-traded product, or trading may be halted by the exchange on which they trade. Principal risks of investing in foreign securities include changes in currency rates, foreign taxation and differences in auditing and other financial standards. Debt securities may be subject to credit risk and interest rate risk. Investments in debt securities typically decrease in value when interest rates rise. Because Van Eck Associates Corporation relies heavily on third party quantitative models, the Fund is also subject to model and data risk. For a description of these and other risk considerations, please refer to the Fund's prospectus and summary prospectus, which should be read carefully before you invest.

Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a prospectus and summary prospectus. An investor should consider the Fund's investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.

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Russian Stock Market Soars in 2016 https://www.vaneck.com/blogs/etfs/russian-stock-market-soars-in-2016/ Russia was among the top performing emerging markets in 2016, and some are saying that Russia is the one country that is likely to benefit from the changing administration in Washington.

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VanEck Blog 2/13/2017 9:28:11 AM

Russia was among the top performing emerging markets in 2016. Its stock market gained 47.44% in USD based on the MVISTM Russia Index (MVRSXTR). Russian small caps were even more impressive, having gained 103.8% in USD based on the MVISTM Russia Small-Cap Index (MVRSXJTR).

Investors may not have been aware of this market surge given news headlines dominated by claims of Russia's interference in the U.S. election. But behind the bluster is an economy that has undergone some notable transformations in the past five years. As shown in the chart below, Russia's economy appears to be righting towards a return to growth, albeit uneven and gradual. What has been most critical to Russia's improving economic health is much needed fiscal and monetary policy reforms and the tailwinds of the early stages commodities rally.

Commodities Provided a Boost

At the end of 2015, we predicted that the end of the commodities bear market might occur in early 2016, and given last year's commodities rally we appear to be well into a new recovery cycle. This was particularly good for Russia given its economy's heavy reliance on energy resources.

Russia is expected to see positive growth in 2017–2018, given that headline financial and economic indicators and trends are now picking up, according to the Brookings Institute. Even with sanctions still in place, conditions have improved to the point that in September 2016, Standard & Poor's upgraded its outlook on Russian credit from negative to stable, citing the easing of external risks.

Russia GDP Annual Growth Rate % is Moving Positive
2008 – 2016

Chart A: World Crude Oil and Liquid Fuels Production Growth

Source: www.tradingeconomics.com, Federal State Statistics Service. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Stability Reinforced by Russia's Conservative Monetary Policy …

In our view, Russia's "moderately tight monetary policy" has been, and remains, excellent. While focused on bringing inflation down, the Central Bank of Russia has let the ruble currency float freely. In addition to further evidence (for example, in the latest purchasing managers' indices) that Russia's growth outlook is gradually improving, the country's medium-term fiscal policy framework continues to look conservative.

Elvira Nabiullina, the bank's head, was named the best Central Bank Governor in Europe in 2016 by international financial magazine, The Banker. We believe this shows that the efforts of the Central Bank have been recognized by its peers.

At VanEck, we continue to believe in the need to take a long-term investment view. The fact that the stabilization of Russia's economy has been in the works for some time perhaps emphasizes this. After taking decisive action by tightening rates in 2014 to stem a rapid devaluation of the ruble, the Central Bank was able to ease interest rates significantly in 2015 to give the economy breathing room to grow. 2016 was quite a stable year as the Central Bank eased interest rates only twice.

Russia Interest Rates: One-Week Repo Rates %
2012-2016

Chart A: World Crude Oil and Liquid Fuels Production Growth

Source: www.tradingeconomics.com, Central Bank of Russia. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

…And its Measured Approach to the Fiscal Budget

Along with central banking policy, Russia has also become more conservative with its fiscal budget. As recently as 2014, Russia's government had forecast oil at $100/barrel for its 2015-2017 budget. This was obviously not the case as oil prices tumbled from above $100/barrel in 2014 to below $40/barrel at the end of 2015, before rebounding to above $50 at the end of 2016. In contrast, the revised budget for 2017 assumes a much more conservative $40/barrel price for oil until 2019.

Is Russia the "Trump Trade" for Emerging Markets?

In addition to these very encouraging developments, President Trump's presence in the White House suggests at least an end to the escalation of sanctions. This would be a particularly good prospect for Russia, not least because it has simply paid down its debt and de-levered during the sanctions period.

Some are saying that Russia is the one country that is likely to benefit from the changing administration in Washington. Given Trump's election, there is optimism that further sanctions are unlikely, at least from the U.S. This may not be the case for Europe, but overall markets are anticipating an easing bias in sanctions against Russia.

Russians may someday proclaim, Communism failed, Western sanctions failed, but Russian markets did not fail. VanEck gives investors access to Russian equity markets through two ETFs: VanEck Vectors Russia ETF (RSX) and VanEck Vectors Russia Small-Cap ETF (RSXJ). Also, our actively managed VanEck Emerging Markets Fund (GBFAX) held a 3.5% exposure to Russia as of 12/31/16.

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Commodities Positioned for More Strength in 2017 https://www.vaneck.com/blogs/natural-resources/commodities-more-strength-in-2017/ We came out of the commodities downturn in 2016, and as we start 2017, we see strong efficiency on the operating side, which should generate robust financial results.

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VanEck Blog 2/10/2017 12:00:00 AM

Watch Video Commodities Positioned for Continued Strength in 2017  

Shawn Reynolds, Portfolio Manager

Watch Now  



The Stage is Set for a Multi-Year Improvement

TOM BUTCHER: Where do you see commodities going in 2017?

SHAWN REYNOLDS: It is important to put commodities markets in context. We need to remember that we are still in the early stages of rebounding from one of the most severe downturns in history. Whether you look at gold, metals and mining, or the energy sector, we have seen a very severe downturn — as bad as anybody still in the industry has ever seen. Gold and mining have been suffering since early 2011, and energy since 2015. You put the negative performance of these sectors together and it makes for a very rough and deep downturn.

Huge Restructurings at the Industry and Company Levels

We started to come out of the downturn in 2016, but we have yet to see the benefits — which were huge restructurings at both the industry and company levels — in terms of operating or financial results. The rebound in 2016 was really just on the back of the upswing in commodity prices.

As we start 2017, we see strong efficiency on the operating side which should generate robust financial results. For the first time in many years, we are likely to see positive momentum in earnings and cash flow, and improving balance sheets. This is setting the stage for a multi-year improvement in the operational and financial performance of commodities industries.

Commodities Companies Benefit in an Inflationary Environment

BUTCHER: Since the financial crisis, the narrative has focused on deflation. Do you think that has changed?

REYNOLDS: It has changed remarkably. Even as late as last year's third quarter, the narrative was still about deflation. And then, as the likelihood of the Fed raising rates in December became more of a reality, driven by high employment and rising wages, we saw an inkling of inflation picking up in some of the emerging markets. Maybe deflation was no longer the biggest risk, maybe inflation was less of a risk than people feared. The point is that the picture was becoming more balanced.

Soon after the U.S. presidential election, the outlook changed dramatically, because if the Trump administration's pro-growth policies result in the types of outcomes that people are hoping for, we may very well see an inflationary period. While it is a risk, to be sure, we don't see it as a major risk. The conversation has flipped to something that investors are starting to contemplate, and certainly the companies that we invest in benefit in an inflationary environment.

Admirable OPEC Compliance with Oil Production Cuts

BUTCHER: Moving to oil, to the surprise of many, both OPEC and non-OPEC producers cut deals to reduce production in December. How do you see the supply situation shaping up?

REYNOLDS: The best way to assess the OPEC agreements is that there has been admirable compliance, which says much about OPEC, because compliance in the past has been defined by those who cheated the least. While it is still the early days, we find it very encouraging to hear the Saudi Arabian oil minister say that he thinks that compliance is quite strong and that his country is cutting production more than required. The supply side from OPEC right now, and certainly in the near future, should be supportive for the supply-demand dynamic.

Non-OPEC Players are Important

Longer term, we must continue to look at some of the non-OPEC players — countries like China or even the major oil-producing companies — as we expect them to continue to have a hard time and to struggle with delivering production growth. For example, if you think about China, which few people talk about in terms of production even though it is probably the world's fifth largest producer, its production last year fell by 300,000 to 400,000 barrels a day, and is projected to fall even farther in 2017, by 400,000 to 500,000 barrels a day. This is significant in the context of a 1.2 million barrels a day cut by OPEC.

Chart A. shows how OPEC oil production is likely to decline in the next year-and-half, and by contrast North America is likely to provide the most oil production growth.

Chart A: World Crude Oil and Liquid Fuels Production Growth  

Chart A: World Crude Oil and Liquid Fuels Production Growth

Source: EIA; January 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Chart B. shows that the Non-OPEC U.S., Russia, and Canada are likely to be the biggest contributors to oil production growth, while China is experiencing the biggest decline in oil production.

Chart B: Non-OPEC Crude Oil and Liquid Fuels Production Growth  

Chart B: Non-OPEC Crude Oil and Liquid Fuels Production Growth

Source: EIA; January 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

U.S. Shale Production Increasingly Efficient

REYNOLDS: Many people are asking about the U.S., where shale production has become increasingly efficient. Is U.S. production going to get back to growth mode? With the rig count rebounding the way it has, we would not be surprised to see some uplift off of the low point after production fell dramatically in 2014 and 2015. Could it be 200,000 or 300,000 barrels a day? Maybe.

But when you start netting all of that out, supply is still coming down on a global basis. This bodes well for stronger, firmer commodities prices that, in conjunction with the operating and restructuring that companies have done, are making the outlook for the commodities sector quite favorable.

Demand Remains Remarkably Resilient

BUTCHER: On the opposite side of the coin, will oil demand hold up?

REYNOLDS: Yes. Our position for many years has consistently been that oil demand is remarkably resilient unless you have gigantic risk or reality of global recession, which we do not expect in 2017. We also see pro-growth policies, fiscal stimulus in the U.S., and support for growth in China as positive drivers. We expect global growth in demand to continue at a fairly robust rate.

 
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Gold Supported By Cracks in Market Confidence https://www.vaneck.com/blogs/gold-and-precious-metals/gold-supported-market-confidence/ The good news for gold is that markets are now beginning to reflect reality, following the irrational euphoria that followed the Trump election. 

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VanEck Blog 2/9/2017 12:00:00 AM

Say Hello to the New Market Obsession

Since the financial crisis of 2008-2009, markets have been obsessed with what the Federal Reserve does or doesn't say or do. In January, the Fed was relatively quiet, giving no indications of an early 2017 rate increase. This silence has forced markets to find a second obsession: The Trump administration. It appears as if there will be at least four more years of obsessing over President Trump's actions and statements (and perhaps even more importantly, his tweets). The good news for gold is that markets are beginning to reflect reality following the irrational euphoria that occurred after the November U.S. presidential election.

Encouraging Start for Gold As Risks Come Into Focus

The risks of a Trump presidency, which we have been highlighting since the election, are coming into clearer focus. President Trump broke with tradition (again) by indicating that a strong U.S. dollar is not necessarily in the best interest of the United States. His chief trading advisor and incoming U.S. Treasury Secretary Steven Mnuchin also made comments that were interpreted as being unsupportive of the dollar. Controversial executive orders and anti-trade maneuvering have damaged confidence and contributed to further dollar weakness. As a result, gold and gold shares have had an encouraging start in 2017, bouncing off oversold yearend levels and benefitting from downward moves in the U.S. dollar. Gold gained $58.38 (5.1%) to end January at $1,210.65 per ounce. The NYSE Arca Gold Miners Index1 (GDMNTR) gained 13.7% while the MVIS Global Junior Gold Miners Index2 (MVGDXJTR) advanced 17.9%.

Markets are fairly good at pricing in demand trends, earnings expectations, technology innovations, and many other things. However, one thing markets have great difficulty putting a price on is uncertainty. Just two weeks in, and it appears that Trump's administration will be unconventional, controversial, and unpredictable. If we could measure the level of market uncertainty over the next four years, it would likely be off the charts. Many people in the U.S. and internationally are genuinely fearful of the future. With interest rates still at microscopic levels and U.S. stocks at all-time highs, gold, in our view, is an obvious investment alternative as a hedge against the potential for uncertain outcomes that may easily damage other asset classes.

Gold Trading Explained: Physical vs. Paper

Given our gold investing expertise, we are often asked about the nature of the gold market, as some investors are perplexed by the volumes traded. Bloomberg recently released an article in which the CPM Group, a research firm specializing in precious and industrial metals, quantified the global gold market. In 2015, 310,358 tonnes (10 billion ounces) of gold were traded globally. The London over-the-counter (OTC) market amounted to 144,000 tonnes, or 46.3% of the gold traded, while the New York futures market accounted for 130,350 tonnes or 42.0%. These numbers stand in stark contrast to the physical demand of 4,124 tonnes estimated by Thompson Reuters GFMS in 2015. The magnitude of the trading stands out further when considering that there have been approximately 170,000 tonnes of gold mined since the beginning of time.

These markets enable a huge portion of gold to trade without the physical movement of a single ounce of gold. Participants in the futures market understand and expect this, so trades are only rarely settled with physical gold. The OTC market is a physical market and much of the gold taken for delivery globally is settled through London. However, an OTC ounce can change hands many times in a day, so only a fraction of the gold traded in London is moved to a new owner. Thus, the overwhelming volume of gold is traded in paper transactions, and not the physical metal.

Treat Gold as a Financial Asset, Not as a Traditional Commodity

Although there are many people who believe gold is a useless relic, the millions who invest in gold believe differently. To make money in this sector, it is crucial to understand the behavior of dedicated gold investors. The most important thing to recognize is that gold (and its paper proxies) is used as a financial asset, not a commodity. It is a safe haven3 store of wealth with no liabilities and has been used as such throughout human history. Therefore, the gold price is not driven by the same supply/demand fundamentals as soybeans, copper, or crude oil, for example.

Chart A shows a traditional commodity price analysis with surpluses and deficits in the physical gold market since 1988. Notice there are many years when the gold price rose when there was a physical surplus. Likewise, there are also years when the price fell and there was a deficit. This doesn't make economic sense, which makes a physical supply/demand analysis an unreliable price indicator. We believe there are three possible reasons for this: 1) the global physical gold market is difficult to measure accurately; 2) the huge above ground stores of gold; and 3) investment drivers in the paper gold market can overwhelm the physical market.

Chart A: Gold Supply versus Price Change
1988-2016

Chart A: Gold Supply versus Price Change

Source: Thompson Reuters GFMS; Bloomberg; VanEck. Data as of December 31, 2016.
Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Western Investment Demand is Behind the Wheel

As 88% of global trading volume occurs in New York and London, we believe the dominant driver of gold prices is Western investment demand. Western investors and others use gold to monetize their views on currencies, interest rates, geopolitical risk, systemic financial risk, central bank policies, inflation, deflation, and tail risk.4 These are the primary factors that help drive the gold price. Technicals are also important, as many investors make decisions based on chart patterns. Prices can be volatile, and this volatility is another aspect that tends to attract certain investors. Commercial players, such as jewelers and producers, use these markets to trade metal or hedge, although we suspect this to be a relatively minor driver compared with investment demand.

According to the CPM Group, China and India are the two largest gold consumers with 1,803 tonnes of combined physical demand in 2015. While this is 44% of physical gold consumption, these two countries account for just 7.9% (24,518 tonnes) of global gold transactions. India has no modern gold exchanges and the Shanghai Gold Exchange and the emerging Chinese futures market have a very long way to go to rival the Western trading hubs. As such, even though Asia accounts for the majority of physical demand, this region tends to be a secondary driver of gold prices. The local markets in India and China typically trade at a premium or discount to Western markets depending on local demand levels.

Asian investors are sensitive to rising prices, as demand tends to increase during periods of price weakness. Asian buying typically helps establish a floor for gold prices, while Western investment demand is usually responsible for driving prices higher.

Manipulation in Gold Market? Maybe. But No Lasting Effect.

We are also asked, because of the unusual structure of the gold market, if the gold market is manipulated. We would not be surprised to find that the gold market has been manipulated, but to a lesser extent than other markets. For example, currency markets are often manipulated by governments. Bond markets have been manipulated by central banks since the financial crisis. Some governments, banks, and hedge funds may occasionally derive some benefit from lower gold prices. We periodically have seen curious price movements caused by large paper market orders at times of thin trading. This has happened especially in weak markets. It would be naïve, however, to dismiss the gold market as "rigged" based on this. While the magnitude of the paper market is remarkable, it is still driven by gold fundamentals. We believe any attempts at manipulation, if successful, can only influence prices over short periods. The gold market is too large for any manipulation to have a lasting effect.

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Moats Start Strong in 2017 https://www.vaneck.com/blogs/moat-investing/moats-start-strong-in-2017/ U.S. domestic and international moats boasted impressive performance during the first month of 2017.

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VanEck Blog 2/8/2017 12:00:00 AM

For the Month Ending January 31, 2017

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") is off to a strong start after outperforming the S&P 500® Index (2.98% vs. 1.90%) in January. Perhaps more impressive, international moat stocks, as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), outpaced the MSCI All Country World Index ex USA (5.13% vs. 3.54%), continuing the strong performance trend they established in the second half of 2016.

U.S. Domestic Moats: Coal Gravy Train

Railroad operated CSX Corp. (CSX US, +29.11%) surged in January on the heels of an improved coal market and outlook. CSX also received a boost from speculation that industry veteran Hunter Harrison, who recently resigned from Canadian Pacific, might take over CSX management duties. Morningstar raised CSX's fair value estimate in late January to equally reflect better pricing, particularly in the coal market, and the time value of money. From a sector perspective, consumer discretionary and information technology companies were the top contributors to U.S. Moat Index performance, led by Twenty-First Century Fox (FOXA US, +11.91%) and salesforce.com, Inc. (CRM US, +15.54%). Healthcare was positive for the month within the Index despite Bristol-Myers Squibb's (BMY US, -15.32%) decline following an announcement that it will not seek accelerated approval for its lung cancer treatment. Real estate was the only sector to detract from U.S. Moat Index performance in January.

International Moats: "G'day Mate"

International Moat Index performance in January was driven primarily by financial companies. The London Stock Exchange Group, PLC (LSE GB, +10.80%) was the top performing company in the sector while banks and exchanges across regions performed strongly. China Construction Bank Corp (939 HK, -2.93%) was the only negative performer in the sector. Australian firms also provided strength in January as biopharmaceutical firm CSL Ltd. (CSL AU, +17.26%) and vitamin herbal and mineral supplement firm Blackmores Ltd. (BKL AU, +17.15%) surged. The "country down under" was the top regional contributor in the International Moat Index for the month. By contrast, Indian tech companies struggled in the International Moat Index in January. Both Tata Consultancy Services Ltd. (TCS IN, -5.29%) and Inforsys Ltd. (INFO IN, -8.02%) posted negative returns as the industry digested the implications of the Trump Administration's immigration policy.

(%) Month Ending 1/31/17

Domestic Equity Markets

International Equity Markets

(%) As of 1/31/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 1/31/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
CSX Corporation
CSX US
29.11
salesforce.com, inc.
CRM US
15.54
Zimmer Biomet Holdings, Inc.
ZBH US
14.66
Cerner Corporation
CERN US
13.38
Twenty-First Century Fox, Inc. Class A
FOXA US 11.91

Bottom 5 Index Performers
Constituent Ticker Total Return
V.F. Corporation
VFC US
-3.51
CBRE Group, Inc. Class A
CBG US
-3.59
Bank of New York Mellon Corporation
BK US
-5.19
TransDigm Group Incorporated
TDG US
-13.08
Bristol-Myers Squibb Company
BMY US
-15.32

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
ENN Energy Holdings Limited 2688 HK 20.28
CSL Limited CSL AU 17.26
Blackmores Limited BKL AU 17.15
Cemex SAB de CV Cert Part Ord Repr 2 ShsA & 1 ShsB CEMEXCPO MM 15.55
Wynn Macau Ltd. 1128 HK 15.47

Bottom 5 Index Performers
Constituent Ticker Total Return
Royal Philips NV PHIA NA -4.13
Tata Consultancy Services Limited TCS IN -5.29
MGM China Holdings Limited 2282 HK -5.92
Safran SA SAF FP -6.11
Infosys Limited INFO IN -8.02

View MOTI's current constituents

As of 12/16/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
CVS Health Corporation CVS US
Guidewire Software GWRE US
Bristol-Myers Squibb BMY US
Zimmer Biomet Holdings Inc ZBH US
TransDigm Group TDG US
Mead Johnson Nutrition Co MJN US
Mondelez International Inc MDLZ US
Pfizer Inc PFE US
Patterson Cos Inc PDCO US
Medtronic plc MDT US
Lowe's Cos Inc LOW US

Index Deletions
Deleted Constituent Ticker
The Bank of New York Mellon Corp BK US
State Street Corp STT US
US Bancorp USB US
Western Union Co WU US
Microsoft Corp MSFT US
LinkedIn Corp LNKD US
CSX Corporation CSX US
Norfolk Southern Corp NSC US
Harley-Davidson Inc HOG US
Tiffany & Co TIF US
Time Warner Inc TWX 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
Cemex SA CPO Mexico
KION Group AG Germany
Cheung Kong Property Holding Ltd Hong Kong
KT Corp South Korea
GlaxoSmithKline United Kingdom
Sun Hung Kai Properties Ltd. Hong Kong
CSL Ltd Australia
Iluka Resources Ltd Australia
Ramsay Health Care Ltd Australia
Orange France
ENN Energy Holdings Ltd China
Telefonica Brasil S.A. Brazil
KDDI Corp Japan
China Telecom Corporation Ltd. China
Sina Corp (Caymans) China
Tata Consultancy Services Ltd India
Nippon Tel & Tel Corp Japan
Singapore Exchange Ltd Singapore
GEA Group AG Germany
China Mobile Ltd. China
Industrial and Commercial Bank of China Ltd China
Fisher & Paykel Healthcare Corporation Ltd New Zealand
Telstra Corp Ltd Australia
Infosys Ltd India
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Danone France
DuluxGroup Ltd Australia
Bureau Veritas SA France
Carsales.com Ltd Australia
William Demant Hldg Denmark
Tencent Holdings Ltd. China
Nidec Corp Japan
Kao Corp Japan
Vicinity Centres Australia
Airbus Group France

Index Deletions
Deleted Constituent Country
Bank of Montreal Canada
Canadian Imperial Bank of Commerce Canada
National Bank of Canada Canada
Power Financial Corp Canada
Cameco Corp Canada
Lloyds Banking Group Plc United Kingdom
Henderson Group Plc United Kingdom
Carnival Pl United Kingdom
Kingfisher United Kingdom
Petrofac United Kingdom
National Australia Bank Ltd Australia
Westpac Banking Corp Australia
AMP Ltd Australia
Commonwealth Bank Australia Australia
Platinum Asset Management Limited Australia
Computershare Ltd Australia
BNP Paribas France
Kering France
Schneider Electric SE France
Carrefour SA France
Nordea AB Sweden
Svenska Handelsbanken Sweden
United Overseas Bank Singapore
Genting Singapore Plc Singapore
Julius Baer Group Switzerland
Roche Hldgs AG Ptg Genus Switzerland
Linde AG Germany
Bayer Motoren Werke AG (BMW) Germany
Wynn Macau Hong Kong
Sands China Ltd. Hong Kong
MGM China Holdings Ltd Hong Kong
Teva Pharmaceutical Industries Israel
SoftBank Group Corp Japan
Wipro Ltd India
Koninklijke Philips Elec NV Netherlands

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



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Fallen Angels Close 2016 on Cloud Nine https://www.vaneck.com/blogs/etfs/fallen-angels-close-2016-on-cloud-nine/ Fallen angel bonds notably outperformed in 2016 mainly due to basic industry and energy sector overweights. 

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VanEck Blog 2/7/2017 12:00:00 AM

Fallen Angel Bonds Outperformed Broad High Yield in 2016

Fallen angels bonds had an outstanding year in 2016, climbing 25.9%, and outperforming the broad high yield bond market by 8.5%, as measured by the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA Index).1 The Index's energy and basic industry sector overweights delivered about 80% of this outperformance. The strength of these sectors was driven largely by the strong rally in commodities that began in the first quarter and continued throughout the year. By contrast, the Index's banking sector overweight and utility sector allocations were a drag on relative returns.

In the fourth quarter, fallen angels outperformed slightly (by 0.1%), attributable to the energy sector overweight and healthcare sector underweight. We think this marginal outperformance is noteworthy given that 5-year U.S. interest rates rose 75 basis points (bps) in the quarter. The sector differentiation of fallen angels offset the relatively higher interest rate duration2 risk they tend to average versus broad market high yield bonds.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) Consistently Outperformed Peers

ANGL - Performance Relative to Peer Group

Source: Morningstar. Data as of December 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. 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 high yield bond peers category is represented by the Morningstar Open End Funds – U.S. – High Yield Bond category. See index descriptions below.

Record Volume Year Helped Highlight Fallen Angel Key Characteristics

2016 witnessed a record volume of new fallen angel bonds, primarily in the energy and basic industry sectors. The 2016 story highlights not only the recent positive impact of fallen angels' sector differentiation, versus broad high yield, but also the contrarian investment mechanism associated with tracking an index of fallen angels. For example, fallen angels benefitted in 2016 from the tendency to be oversold leading up to their downgrades to below investment grade ratings. Approximately 35% of the Index's market value comprised 2016's fallen angels at the time of their entrance.

Fallen angels continue to have an average higher credit quality than that of the broad high yield bond market. Market turbulence in 2015 and early 2016, sparked by weak commodity prices and interest rate concerns, sent risk asset prices downward. However, fallen angels' higher average quality orientation helped absorb some of that volatility. This led to outperformance over the broad high yield bond market during that time. With about an average 75% of BB-rated3 bonds, fallen angels entered 2017 as one option to ratchet up credit quality within a high yield allocation.

2017 Outlook

Fallen angels are not likely to have a repeat of last year's nearly 26% climb. We expect that fixed income markets will be more volatile this year (see 2017 Investment Outlook for more details). Given the rising and potentially more volatile rate environment, we predict that 2017 will be more about having an income cushion to offset rate moves. High yield, in general, has offered that yield cushion. Within high yield, fallen angels at the start of 2017 represent overweight positions in the energy and basic industry sectors, both of which, may be likely to do well from a fundamental perspective under scenarios where rates do indeed continue to rise. Fallen angels also average higher credit quality than the broad high yield market, which may offer downside protection during risk off periods in what could be a very volatile year.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) received a three-year and overall five-star rating from Morningstar, as of December 31, 2016.4 ANGL was rated against 602 funds in Morningstar's high yield bond category 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 »

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Spin-Off Activity Likely to Remain High in 2017 https://www.vaneck.com/blogs/etfs/spin-off-to-remain-high-in-2017/ We believe that spin-off activity will remain high in 2017, with approximately 10 transactions currently expected to take place during the first half of the year. 

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VanEck Blog 2/2/2017 12:00:00 AM

GSPIN Performance Recap and Major Trends

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.

The Horizon Kinetics Global Spin-Off Index (GSPIN) is a unique, rules-based index that tracks the performance of passively distributed spin-offs in the U.S. and developed markets of Western Europe and Asia, including Australia. It is the underlying Index of VanEck Vectors Global Spin-Off ETF (SPUN).

Small-Cap Companies Help GSPIN Performance in 4Q'16

In the fourth quarter of 2016, GSPIN returned 2.91%, while its benchmark, the MSCI World Index, returned 1.86%. Top contributors to Index performance in 4Q were: Chemours Co. (CC US), Global Brands Group Holdings (787 HK), and KLX, Inc. (KLXI US). By contrast, the biggest detractors from 4Q performance were: News Corp. (NWSA US), Mallinckrodt Plc (MNK US), and Liberty TripAdvisor Inc. (LTPRA US).

The Index's exposure to small-cap stocks during the fourth quarter provided a boost to performance, with companies between $500 million and $2 billion accounting for the bulk of the Index's return. As a reminder, the Index uses an equal-weight methodology; this is meant to ensure that smaller capitalization constituents can have a meaningful impact on returns, while in a market-cap weighted index they would be dwarfed by the large-cap constituents.

For the year 2016, GSPIN's outperformance against its benchmark was even wider, with GSPIN gaining 23.55% compared to 7.51% for its benchmark. For the full year 2016, top contributors to Index performance were: Chemours Co. (CC US), South32 Ltd. (S32 AU), and WPX Energy, Inc. (WPX US); the weakest performers in 2016 were: Gannett Co., Inc. (GCI US), California Resources Corp. (CRC US), and Liberty TripAdvisor Holdings Inc. (LTPRA US)

View Current GSPIN Index Holdings

Spin-Off Trends: Greater Diversification as Commodities Improve

In 2017, we believe that spin-off activity will remain high, with approximately 10 transactions currently expected to take place during the first half of the year. Further, a number of small-cap companies qualified for inclusion this quarter, as increasing prices for commodities such as oil, natural gas, base metals, and specialty chemicals have benefitted equities (particularly in the materials and industrials sectors) with exposure to these commodities. As a result, the Index re-included a number of small-cap companies that had been Index constituents previously, but had been removed because they had fallen below the $500 million market-cap minimum.

These additions, which included companies such as California Resources Corp. (CRC US), TimkenSteel Corp. (TMST US), Rayonier Advanced Materials Inc. (RYAM US), and Exterran Corp. (EXTN US), as well as several other existing Index constituents, are providing greater exposure to the commodities markets and have lent greater diversification to the Index. This exposure should benefit the Index in the event that commodities prices continue to strengthen.

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2017 Investment Outlook: Filter Out Noise and Focus on Fundamentals https://www.vaneck.com/blogs/market-insights/2017-investment-outlook/ We are very bullish on equities, as the macroeconomic picture is good.  Although valuations are stretched, which is a slight negative, there is little reason not to be fully allocated.

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VanEck Blog 2/1/2017 12:00:00 AM

Watch Video 2017 Investment Outlook  

Jan van Eck, CEO, shares his investment outlook.

Watch Now  



Commodities Rebound We Predicted in 2016 Likely to Continue in 2017

TOM BUTCHER: 2016 was a pivotal year, with commodity prices bottoming out and a big shift in the interest rate narrative. What do you think will happen in 2017?

JAN VAN ECK: The events of 2016 are a major factor in how we see 2017. From a historical perspective, there were two big shifts in 2016. One shift, as you mentioned, was that commodities finally bottomed after dropping for five years, which affected almost every asset class. [See When Will Commodities Recover for our earlier prediction.] U.S. equities were affected because corporate earnings turned positive only when energy companies started recovering in the third quarter. In fixed income, high yield improved after investors realized that energy companies were not going bankrupt. Emerging markets — equities, fixed income, and foreign exchange — all bottomed because they are essentially driven by commodities. We think the commodities recovery will continue in 2017 given that most commodity recoveries last longer than a year as shown below. This also may mean that a bull market in emerging markets is gaining momentum.

Most Commodity Recoveries Last Longer than a Year

Most Commodity Recoveries Last Much Longer than Six Months

Source: VanEck; Bloomberg. Data as of January 18, 2017.

Central Banks Tighten and End Delusional Love Affair with Negative Interest Rates

The second shift was in interest rates. A year ago, Japan started moving toward negative rates. It was the height of central banks' love affair with using negative rates to try to stimulate the world economy.1 Most economists thought this was delusional and that people were afraid of negative rates rather than being encouraged and more excited about doing business.

What happened in 2016 was that the move to negative rates reversed course. After the U.S. started to tighten monetary policy in December 2015, Federal Reserve Chair Janet Yellen talked about negative rates in the second quarter but walked away from them as the year progressed. The fixed income environment became more volatile in the third quarter and has stayed that way into 2017.

Trump Administration is Pro-Growth

BUTCHER: How do you expect the Trump administration to affect your outlook?

VAN ECK: As an investor, you have to filter out a lot of the noise and just look at the fundamental policies, and break it down that way. Fiscal policy is expected to be more stimulative because Trump will likely cut corporate taxes. And investors realize that monetary policy is going to have to tighten to offset that. Net-net, you have a plus and minus that balance each other out. It means a little bit more of a pro-growth outlook, and growth around the world is rising.

On trade, we do not foresee a big jolt to current policy. There will be a lot of political rhetoric around it, some changes and renegotiation of treaties, but we just cannot see it being a major growth inhibitor in 2017. On fiscal policy, will Congress, Paul Ryan, and the Democrats allow greater overall spending, or will they combine it with longer-term adjustments to the budget that reduce the U.S.' debt growth? That's the real question.

Investors Should Look More Closely at U.S. Long-Term Debt Problem…

BUTCHER: What should investors be looking for in 2017?

VAN ECK: A key question is whether Congress will fix the U.S.' long-term debt problem. If it doesn't, entitlement systems like Social Security and Medicare will likely go bankrupt in 15 years. If they bend the yield curve, I can see rates going higher, which is good in a way because bullishness will continue.

…And to China's Response to Global Pressure to "Stop" Dumping Cheap Goods

Another big discussion is about the trade deficit and how it affects emerging markets. While President Trump has talked aggressively about trade, he is actually in complete agreement with Obama and Europe on the issue because China has increased its capacity in steel and other industries and has been dumping it on the rest of the world. And the rest of the world is saying "Stop!"

The thing to look for is how China reacts to this pressure. China is the largest global economy that is the least in favor of free trade when it comes to themselves. But if China changes its stance, it could be very bullish for emerging markets because it could motivate China to get going with badly needed reforms of their state-owned enterprises, which are major players in emerging economies.

Weight-of-the-Evidence Points to Global Stocks as a Major Allocation

BUTCHER: Are you bullish on equities?

VAN ECK: We are indeed bullish on equities. We think the macroeconomic picture is very good. Although valuations are stretched, which is a slight negative, there is little reason not to be fully allocated. We are as overweight in equities as we have been in the last several years. [See Allocation: Go. Stocks! Go for our current allocation views.]

Fixed Income Investing Likely to be More Volatile in 2017

BUTCHER: What else is the firm focusing on now?

VAN ECK: In fixed income, investors have to deal with this more volatile environment, and we see four different ways they can go with it:

  • Number one, you can shorten duration and go shorter-term on your funds.
  • Number two, you can go for alternative types of income.
  • Number three, you can take more credit risk, which is what we are most excited about. Buy high yield in the U.S. or emerging markets, for example, and earn higher interest rates as duration bounces around.
  • And finally, you can say, "I don't know what to do," and invest with an unconstrained bond manager.

 

Additional Resources

Please see the presentation, 2017 Investment Outlook: Commodities Positive, Four Strategies for Higher Interest Rates, for more details on our Investment Outlook.

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How Emerging Markets Bonds Enhance Portfolio Construction https://www.vaneck.com/blogs/emerging-markets-bonds/enhance-portfolio-construction/ VanEck Blog 1/30/2017 10:14:14 AM

The emerging markets debt market has evolved significantly over the past two decades, growing in both size and diversity. The market's growth reflects the dynamic structural reforms that have transformed many emerging markets economies and helped boost economic growth. Also, investor understanding and appetite for emerging markets bonds has increased significantly as more investors seem to recognize the asset class's potential income and diversification benefits.  

In this five part blog series (read my previous post, The New Year May Bring Opportunities in Emerging Markets Bonds), we advance the case for investing in emerging markets bonds and identify some of the potential opportunities the asset class may offer in today's market environment.  

Historical Performance of Emerging Markets Bonds

This blog, the final of our five part series, concludes with a brief overview of the performance characteristics and potential opportunities available when investing in the asset class from a portfolio construction perspective.

The historical performance of various sectors of emerging markets bonds is shown below compared to certain developed markets fixed income asset classes. The chart also shows emerging markets equities which have actually underperformed emerging markets bonds over the period and with much higher volatility.

Comparable 10-Year Returns: Emerging Markets and U.S. High Yield Corporate Bonds

Over the 10-year time period analyzed, U.S. dollar-denominated sovereign bonds outperformed most other fixed income sectors on both an absolute and risk-adjusted basis. Local currency sovereign emerging markets bonds were more negatively impacted by events of the past few years, including slower global growth, a strong U.S. dollar, and weak commodity prices. Within emerging markets corporate bonds, those rated high yield provided returns comparable to U.S. high yield bonds over the period.

Asset Class Performance Comparison
January 2007 – December 2016

Asset Class Performance Comparison
Asset Class Performance Comparison Table

Source J.P. Morgan, BofA Merrill Lynch and Morningstar as of 12/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Diversified Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Global Diversified. EM USD Corporate represented by J.P. Morgan CEMBI Broad Diversified. EM HY represented by BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index. EM US IG Sov represented by the by J.P. Morgan EMBI Global Diversified IG Index. EM Equity represented by MSCI Emerging Markets NR Index. US HY Corporate represented by the Bloomberg Barclays US Corporate High Yield Bond Index. Global Aggregate represented by Bloomberg Barclays Global Aggregate Bond Index. US Aggregate represented by the Bloomberg Barclays US Aggregate Bond Index. US Equity represented by the S&P 500 Index. Past performance is no guarantee of future results. Index descriptions are below.

From a diversification perspective, emerging markets bonds generally exhibit moderate correlation to other core fixed income asset classes. As one might expect, U.S. dollar-denominated emerging markets sovereign bonds exhibit a higher correlation to U.S. dollar asset classes than local currency emerging market bonds.

Emerging Markets Bonds Provide Unique Diversification

Due to their generally higher volatility and exposure to risk, emerging markets bonds should not be expected to provide the "ballast" to investor portfolios that an asset class like U.S. Treasuries can provide. However, they generally exhibit lower correlation to U.S. equities versus U.S. high yield bonds, indicating diversification potential within an investor's credit portfolio.

Another potential opportunity becomes evident when analyzing the correlations and historical returns of emerging markets corporate bonds compared to emerging markets equities. Over the 10-year period analyzed, emerging markets high yield corporate bonds had greater returns than emerging markets equities, with lower volatility and the benefit of a substantial and steady yield. Due to similar correlation to U.S. equities and global fixed income asset classes, there may be a case for allocating a portion of emerging markets equity exposure into emerging markets high yield bonds.

Correlation of Monthly Returns
January 2007 - December 2016

Correlation of Monthly Returns

Source J.P. Morgan, BofA Merrill Lynch and Morningstar as of 12/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Diversified Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Global Diversified. EM USD Corporate represented by J.P. Morgan CEMBI Broad Diversified. EM HY represented by BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index. EM US IG Sov represented by the by J.P. Morgan EMBI Global Diversified IG Index. EM Equity represented by MSCI Emerging Markets NR Index. US HY Corporate represented by the Bloomberg Barclays US Corporate High Yield Bond Index. Global Aggregate represented by Bloomberg Barclays Global Aggregate Bond Index. US Aggregate represented by the Bloomberg Barclays US Aggregate Bond Index. US Equity represented by the S&P 500 Index. Index definitions are below.

Emerging Markets Bonds Can Boost Income Producing Potential

For income oriented investors, emerging markets bonds may also boost a portfolio's income producing potential. As discussed in previous posts, this yield pickup may be attractive in absolute terms, particularly in light of the improving fundamentals within emerging markets corporates, and in relative terms when compared to their developed markets counterparts.

Yield Comparison
As of December 31, 2016

Yield Comparison

Source J.P. Morgan, BofA Merrill Lynch and Morningstar as of 12/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Diversified Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Global Diversified. EM USD Corporate represented by J.P. Morgan CEMBI Broad Diversified. EM HY represented by BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index. EM US IG Sov represented by the by J.P. Morgan EMBI Global Diversified IG Index. EM Equity represented by MSCI Emerging Markets NR Index. US HY Corporate represented by the Bloomberg Barclays US Corporate High Yield Bond Index. Global Aggregate represented by Bloomberg Barclays Global Aggregate Bond Index. US Aggregate represented by the Bloomberg Barclays US Aggregate Bond Index. US IG Corp represented by the Bloomberg Barclays US Corporate Bond Index. Index definitions are below.

Overall, allocations to the various sectors of emerging markets bonds have historically provided investors the opportunity to enhance yield and diversification within a diversified portfolio. However, investors should keep in mind that there is significant diversity within emerging markets bonds. Each country has a unique economy with differing policies and social and political structures which can impact long-term investor returns. Although an analysis of the characteristics of each emerging markets bonds sector is beyond the scope of this blog, each is affected differently by shifts in interest rates (U.S. and local), currencies, and credit spreads. As a result, each sector may exhibit very different risk and return profiles over a given time period. Investors may not realize the full benefits of emerging markets bonds with exposure to only one of these sectors.

10-Year Risk/Return Comparison
As of December 31, 2016

10-Year Risk/Return Comparison

Source J.P. Morgan and Morningstar as of 12/31/2016. EM USD Sovereign represented by J.P. Morgan EMBI Global Diversified Index. EM Local Sovereign represented by J.P. Morgan GBI-EM Global Diversified. EM USD Corporate represented by J.P. Morgan CEMBI Broad Diversified. EM HY represented by BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index. EM US IG Sov represented by the by J.P. Morgan EMBI Global Diversified IG Index. Index definitions are below.

A Strong Investment Rationale for Emerging Markets Bonds

At VanEck, we believe the long-term investment rationale for emerging markets bonds remains strong as the asset class continues to grow in both size and diversity. Over the past several decades, emerging markets economies have evolved and are today characterized by more dynamic and less vulnerable economies. Economic growth, although slowed by recent headwinds, has remained higher than in developed markets and is expected to increase.

We believe emerging markets debt will remain attractive for income-seeking investors, who may benefit from the yields the asset class can potentially provide, as well as supportive fundamentals and global monetary policies. Investors must balance the potential yield achieved with the additional risks associated with these investments, such as foreign exchange rate or political risk. However, with generally low allocations to emerging markets bonds in many global bond funds, we believe this asset class warrants a strategic allocation given the unique characteristics and opportunities it can offer.

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The Trump Dump in Muni High Yield Creates Opportunity https://www.vaneck.com/blogs/muni-nation/trump-dump-muni-high-yield-opportunity/ In a surprise twist, municipal high yield moves inversely to corporate high yield following the U.S. presidential election of Donald Trump.

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VanEck Blog 1/25/2017 11:57:30 AM

An oddity that has become evident in the weeks following the U.S. presidential election of Donald Trump has been not the rapid response by U.S. Treasury yields to move to higher, but the near inverse move by municipal high yield compared with corporate high yield. Corporate high yield performed quite well during the turbulence of the last half of 4Q 2016, with yields declining and prices appreciating. As the equity markets soared in anticipation of greater government spending and tax reduction measures, so, too, did assets in corporate high yield funds. By contrast, municipal high yield unexpectedly struggled during this period, with yields rising and values dropping. As I explore below, however, this means that opportunity has returned to municipal high yield.

Municipal High Yield Behaves Abnormally Following the U.S. Election

With the prospect that interest rates were likely to rise given the expected Trump initiatives, it comes as no surprise to me that portfolio adjustments would lead to selling and repositioning. And a near-term move to higher rates would, for high grade corporates as well as high grade municipals, result in negative performance. In fact, this is what occurred through the second week of December. But what was odd and abnormal, for the muni market at least, was an even more severe negative response by investors to municipal high yield.

If the proposition that high yield is far less volatile and less liquid than its high grade counterparts, it would stand to reason that in the selloff, muni high yield would be the better bet as far as holding its value. In fact, given the direct connectivity of a significant number of sectors to benefits from Trump's initiatives, high yield should have outperformed not underperformed.

Opportunity Returns to Municipal High Yield

The good news is measurable opportunity has returned to municipal high yield. Currently yields are well above the long-term average and nominally above corporate high yield, a measure I have often spoken of as a signal for tactical allocation. The accompanying charts make the point that despite the end of year performance downturn, municipal high yield is currently offering both outstanding relative value and attractive yields. I believe it's time to hit the "reset" button and reconsider municipal high yield.

Index/Benchmark Yields
Month-End November and December 2016

Source: Bloomberg Barclays and www.treasury.gov. Index definitions below. Past performance is no guarantee of future results.

HY Muni Bonds / U.S. HY Corps Yield Ratio
December 1995 – December 2016

Source: Bloomberg Barclays. Data as of 12/31/2016. Past performance is no guarantee of future results.

HY Muni Bonds: Bloomberg Barclays Municipal High Yield Bond Index is a rules-based, market value-weighted index engineered for the long-term below investment-grade tax-exempt bond market. U.S. HY Corps: Bloomberg Barclays U.S. Corporate High-Yield Bond Index is a rules-based, market value-weighted index engineered for the long-term below investment-grade corporate bond market. U.S. Corps: Bloomberg Barclays Corporate Bond Index is a rules-based, market value-weighted index engineered for the long-term taxable corporate bond market. Muni Bonds: Bloomberg Barclays Municipal Bond Index is a rules-based, market value-weighted index engineered for the long-term tax-exempt bond market. Global Aggregate: Bloomberg Barclays Global Aggregate Bond Index provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities.

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Go, Stocks. Go! https://www.vaneck.com/blogs/allocation/ve-ndr-go-stocks-go/ At this writing, VanEck NDR Managed Allocation Fund is dominated by a nearly 86% global stock allocation given the weight-of-the-evidence of NDR’s unique set of 130 objective indicators.

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VanEck Blog 1/25/2017 12:00:00 AM VanEck NDR Managed Allocation Fund

VanEck NDR Managed Allocation Fund tactically adjusts its asset class exposures across global stocks, U.S. fixed income, and cash using an objective investment process driven by macroeconomic, fundamental, and technical indicators developed by Ned Davis Research (NDR). Fund details are available here.

Weight-of-the-Evidence Points to Global Stocks

The weight-of-the-evidence of NDR's unique set of more than 130 objective indicators has solidly pointed to global stocks in the past few months and at this writing, VanEck NDR Managed Allocation Fund is dominated by a nearly 86% global stock allocation. This commentary briefly explores recent Fund performance, current allocation, and the weight-of-the-evidence that helped the Fund to successfully navigate the two critical events that surprised markets in 2016: the U.K. Brexit decision and Trump's U.S. presidential victory.

December and 2016 Performance Review

As shown in the table below, VanEck NDR Managed Allocation Fund outperformed its benchmark which is a blend of 60% stocks (measured by the MSCI All Country World Index [ACWI]) and 40% bonds (measured by the Bloomberg Barclays US Aggregate) in December, with a return of 1.44% versus 1.38% for its benchmark, and has outperformed since its inception in May 2016 (5/11/16), with a return of 5.27% return versus 3.88% for its benchmark.1

Average Annual Total Returns(%) as of December 31, 2016
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.44 5.27
Class A: Maximum 5.75% load -4.39 -0.77
60% MSCI ACWI/
40% Bloomberg US Agg.1
1.38 3.88

The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at net asset value (NAV). Index returns assume that dividends of the Index constituents in the Index have been reinvested.

Returns less than a year are not annualized.

Expenses: Class A: Gross 1.47%; Net 1.34%.
Expenses are capped contractually until 05/01/18 at 1.15% for Class A. Caps exclude certain expenses, such as interest.

Current Positioning January 2017

At this writing, VanEck NDR Managed Allocation Fund is invested nearly 86% in global stocks, which is more than the equity exposure it maintained throughout the fourth quarter of 2016. The Fund's regional equity allocations shifted in favor of the U.S. and Japan. Beginning in 2017, all exposure to emerging markets was removed and the Fund's overweight position in Canada was reduced. Within the U.S., the Fund increased its equity positions in small-cap and value, and reduced its positions in large-cap and growth.

U.K. Indicators Composite, 2016 Chart

Source: VanEck. Data as of January 4, 2017.

2016 Was a Year of Notable Events

2016 was a very tumultuous year. The VanEck NDR Managed Allocation Fund successfully navigated the two key events that surprised markets in 2016: the June U.K. Brexit decision and the November U.S. presidential election. One of the biggest takeaways from the Fund's 2016 outperformance is that the Fund thrived despite the uncertainty surrounding both of these events. We believe that this success can be firmly attributable to the Fund's objective, data-driven, weight-of-the-evidence approach.

Let's explore how the Fund reacted to both of these key events.

Bearish on the U.K. Following Brexit

On June 23, shortly after the Fund launched, U.K. voters unexpectedly chose to leave the European Union in its Brexit vote. This was a shock, as most polls were predicting a vote to "remain." The surprising "leave" vote caused markets to react violently. In the two days following the vote, U.K. stocks plunged 16.56% and concerns over the fallout dragged the global markets down 7.20%.

As shown in the chart below, NDR's composite of macroeconomic, fundamental, and technical indicators had started turning bearish for the U.K. at the end of the first quarter and became even more bearish in May and June leading up to the Brexit vote.

U.K. Indicators Composite, 2016

U.K. Indicators Composite, 2016 Chart

Source: Ned Davis Research. Data as of December 31, 2016. Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

The weight-of-the-evidence of the NDR indicators resulted in the Fund having no exposure to the U.K. both ahead of and following the Brexit vote. This U.K. positioning, along with an underweight exposure to the Europe ex U.K. region, resulted in the Fund being roughly 12% underweight in these regions overall compared to its benchmark during the month. In June, the Fund outperformed its benchmark by nearly 100 basis points, returning 1.35%, while the benchmark gained a modest 0.39%.

Bullish on Equities Leading up to Trump's Presidential Victory

Four and a half months later, on November 8, the markets were surprised yet again by the historic results of the U.S. presidential election. The pollsters got their predictions of a Clinton win wrong and the world woke up on November 9 to Donald Trump as the incoming U.S.'s 45th President. In reaction to Trump's pro-business agenda, stocks moved higher, while bond prices plummeted on fears of inflation.

NDR's Stock vs. Bond composite of macroeconomic, fundamental, and technical indicators had turned decidedly bullish in September and maintained various levels of bullishness leading up to and following the election.

Overall Stock vs. Bond Indicators Composite, 2016

Overall Stock vs. Bond Indicators Composite Chart

Source: Ned Davis Research. Data as of December 31, 2016. Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. Past performance is no guarantee of future results.

This resulted in the Fund maintaining an allocation of more than 80% to stocks from September through December. Although it may have felt uncomfortable to have such a significant overweight to stocks going into a highly contentious presidential election, it turned out to be the right call as the Fund outperformed its benchmark by nearly 100 bps in the month of November (0.54% versus -0.46%).

The large overweight to stocks was the Fund's biggest contributor to performance as global stocks outperformed bonds by 5.05% from the election through yearend.

Keep Emotion Out of Investing:
2016's Big Takeaway for VanEck NDR Managed Allocation Fund

While past performance is no guarantee of future results, VanEck NDR Managed Allocation Fund's reliance on an objective, data-driven, weight-of-the-evidence approach, helped it to navigate the latter half of 2016, and to avoid the human behavioral issues that hurt most investors. During periods of stress, people often make the wrong decisions at the worst possible times, particularly when it comes to investments. According to the 2015 edition of Dalbar's Quantitative Analysis of Investor Behavior study, investor behavior was the leading cause for underperformance, accounting for 45% of equity fund losses over the last 20 years.

Additional Resources

IMPORTANT DISCLOSURE

1The Fund's benchmark is a blended index consisting of 60% MSCI All Country World Index (ACWI) and 40% Bloomberg Barclays US Aggregate Bond Index. The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries and covers approximately 85% of the global investable equity opportunity set. The MSCI benchmark is a gross return index which reinvests as much as possible of a company's gross dividend distributions. The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.

Global stocks are measured by the MSCI ACWI and U.S. bonds are measured by the Bloomberg Barclays US Aggregate Bond Index. Large-cap stocks are measured by the Russell 1000 Index, an index of the largest 1,000 companies in the Russell 3000 Index. The Russell 1000 Index comprises over 90% of the total market capitalization of all listed U.S. stocks. Small-cap stocks are measured by the Russell 2000 Index, an index which measures the performance of the smallest 2,000 companies within the Russell 3000 Index. Value stocks are measured by the Russell 3000 Value Index, a market capitalization weighted equity index based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform. Included in the Russell 3000 Value Index are stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates. Growth stocks are measured by the Russell 3000 Growth Index, a market capitalization weighted index based on the Russell 3000 index. The Russell 3000 Growth Index includes companies that display signs of above average growth. Companies within the Russell 3000 that exhibit higher price-to-book and forecasted earnings are used to form the Russell 3000 Growth Index.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index's performance is not illustrative of the Fund's performance. Indices are not securities in which investments can be made.

You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program rather than a complete program. All mutual funds are subject to market risk, including possible loss of principal. Because the Fund is a "fund-of-funds," an investor will indirectly bear the principal risks of the exchange traded products in which it invests, including but not limited to, risks associated with smaller companies, foreign securities, emerging markets, debt securities, commodities, and derivatives. The Fund will bear its share of the fees and expenses of the exchange-traded products. Consequently, an investment in the Fund entails more direct and indirect expenses than a direct investment in an exchange-traded product. Because the Fund invests in exchange-traded products, it is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an exchange-traded product's shares may be higher or lower than the value of its underlying assets, there may be a lack of liquidity in the shares of the exchange-traded product, or trading may be halted by the exchange on which they trade. Principal risks of investing in foreign securities include changes in currency rates, foreign taxation and differences in auditing and other financial standards. Debt securities may be subject to credit risk and interest rate risk. Investments in debt securities typically decrease in value when interest rates rise. Because Van Eck Associates Corporation relies heavily on third party quantitative models, the Fund is also subject to model and data risk. For a description of these and other risk considerations, please refer to the Fund's prospectus and summary prospectus, which should be read carefully before you invest.

Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a prospectus and summary prospectus. An investor should consider the Fund's investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.

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Commodities Rebound Sparks Bull Market Buzz https://www.vaneck.com/blogs/natural-resources/commodities-rebound-sparks-bull-market-buzz/ Natural resources equities and commodities markets improved considerably in 2016, and we expect that the next commodity bull market is now firmly anchored in place.

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VanEck Blog 1/25/2017 12:00:00 AM

As we look at the prospects for commodities in 2017, and even further ahead, we believe it is extremely important to keep in mind that the depths of gloom plumbed in February 2016 marked the low point in probably one of the deepest and historically longest downturns for commodity markets. However, these markets improved considerably in 2016, and we expect their emergence and rebound not to be short lived. We consider that the three pillars of the next commodity bull market – technicals, macro, and fundamentals—are all now firmly anchored in place, and we explore why in this post.

4Q'16 Hard Assets Equities Strategy Review

For the calendar year 2016, VanEck's hard assets strategy had a very strong year, outperforming its benchmark by returning 43.17% compared to 30.87% for the Standard & Poor's North American Natural Resources Sector Index (SPGINRTR).1 In the fourth quarter specifically, the strategy slightly lagged the SPGINRTR by posting a 3.45% return compared to the Index's 5.02%.

For the three month period,2 the strategy's positions in the Energy sector and the Diversified Metals & Mining sub-industry were the most significant contributors to positive performance. Within the Energy sector, positive performance stemmed mainly from the Oil & Gas Drilling sub-industry; at the same time, the Oil & Gas Equipment & Services made a notable contribution. Other positive results were gained from Copper, Fertilizers & Agricultural Chemicals, and Steel. Throughout the quarter, the strategy continued to hold no positions in Integrated Oil & Gas. The strategy's Gold positions were the largest detractors in the fourth quarter, continuing the reversal which began in the third quarter following strong performance in the first half of 2016.

Demand for Commodities Resilient

Throughout the fourth quarter, investor sentiment remained positive and the demand for commodities stayed remarkably resilient. As was the case in the third quarter, the most significant macroeconomic factor influencing the hard assets strategy's market universe was the extraordinary monetary accommodation extended by global central banks, which continued to add support for commodities.

In addition, two significant fourth quarter events proved to be quite supportive for commodities. First, the expectation of infrastructure and fiscal spending that followed Donald Trump's victory in the U.S. presidential election helped highlight solid positive performance in the commodities space and raised the potential of further demand strength for many basic commodities. This was particularly reflected in the performance of the broader Industrial Metals Mining sector. Similarly, the steel sector posted strong results in the fourth quarter. Steel companies, in general, were aided by solid demand and U.S.-based companies were specifically helped by tariffs on imported Chinese steel.

Oil Prices Rise on News of OPEC Output Cuts

Second, after having been essentially defunct, OPEC was "resurrected" by Saudi Arabia when it announced at its November meeting that member countries had agreed to the first oil output cuts since 2008. Though Iran was allowed to boost its output slightly from October levels, both Iraq (and for the first time in 15 years) non-OPEC Russia, agreed to output cuts as well in support of propping up oil prices. OPEC's November announcement to slash output by 1.2 million barrels a day from January 1, 2017 was followed by an additional announcement in mid-December that OPEC and non-OPEC producers had reached their first deal since 2001 to curtail oil output jointly. On December 10, producers from outside the organization agreed to reduce output by some 558,000 barrels a day, with Russia accounting for the lion's share. The oil market reacted accordingly with prices rising and front-month West Texas Intermediate (WTI) crude oil ending 11% higher for the quarter at $53.72.

U.S. Oil Rig Count Rebounds by 26% in 4Q

The U.S. rig count continued to ease its way up from the trough levels reached in May. Over the quarter, 136 oil and gas rigs were added, an increase of nearly 26%. However, we continue to believe that any such rebound should be viewed as incremental when compared with the more than 1,500 rigs that were taken out of commission across the U.S. between late September 2014 and early May this year.

On the demand side, global demand for crude oil and gasoline remained robust during the quarter. U.S. gasoline demand remains at record highs, and the country continues to consume around 10 million barrels a day. U.S. gasoline demand also continues to exceed the unrefined crude oil demand of every country in the world except China.

Gold Consolidates, Pressured by Fed Rate Hike and Strong U.S. Dollar

The gold market experienced further significant consolidation during the fourth quarter. Gold equity prices were pressured by the U.S. Federal Reserve's rate hike and a significantly stronger U.S. dollar. However, we still believe that gold miners, strengthened by strategic improvements and ongoing restructurings, continue to be well positioned to withstand the current decline in the gold price, which is likely to be short term as global financial risks still appear on the horizon.

Base Metals Benefit from Rebalancing Supply and Demand

Among base metals, zinc and copper continued to benefit from a rebalancing of supply and demand. Zinc, in particular, had a further reduction in overall output as miners closed and/or restricted activities. Zinc three-months forward on the London Metals Exchange (LME) peaked at US$2,900 at the end of November and ended the quarter up over 8%. In response to restricted supply, at the end of December the Zhuzhou Smelter Group Co. (the strategy had no exposure during the quarter), the largest refined zinc producer in China, announced that it planned to cut output in January. (We have addressed this in several blog posts in 2016, including Deleveraging Tightens Metals Supply and Zinc's Year to Remember.)

Agriculture Valuations Strengthened

Abundant supplies of agricultural goods, particularly grains and commodity fertilizers continued to keep a lid on most agricultural commodity prices, despite near record demand across the complex. Nevertheless, reflecting three years of current soft prices and a broadly depressed farm economy, there has been an unprecedented wave of prospective consolidation in the industry. Seed companies have sought to merge with crop protection companies to offer a full and more robust suite of products. Input providers have also looked to consolidate and rationalize mergers across companies involved with potash, phosphate, and nitrogen. As a result, Agriculture sector valuations strengthened during the quarter and bolstered share prices for many players.

A Half-Full Glass Indicates a More Robust GDP Outlook

As we have always said, our hard assets strategy does not necessarily need economic and market winds at its back to deliver performance; we just need gale-force winds in its face to dissipate. As 2016 unfolded, there were increasing signs that the global economy and equity markets had become accustomed to rolling economic and geopolitical risks and, at best, by yearend, had begun to anticipate and recognize the signs of a more robust global GDP outlook. While we believe the balance of risks at the beginning of 2016 paid homage to these past fears, as the year progressed, markets began underwriting a more positive tilt, seeing the glass as half-full rather than half-empty.

Commodity Bull Market is Now Anchored in Place

As we discussed above, we consider that the three pillars of the next commodity bull market – technicals, macro, and fundamentals – are all now firmly anchored in place. Here's why.

Technicals: Commodities are naturally cyclical and self-correcting, with cycles that typically last years. We are emerging from one of the worst bear markets ever and believe that the cyclical and secular adjustments we are now seeing are setting the stage for the next multi-year upswing. In the past, periods of a 20% to 50% decline in natural resources equity values have often preceded the start of a new cycle. Cycles have lasted upwards of six years with, in some cases, equity values doubling within the first three years. Also, both energy and diversified mining exposures in the major indices currently remain below their long-term values.

Macro: What remain unprecedented are the monetary and fiscal policies currently being employed by central banks in their attempts to spur global growth. Not only have these policies led to an even greater expansion of the assets held by major central banks around the globe, we believe they have also further tightened the coiled spring of inflation.

Fundamentals: Global commodity demand remains remarkably resilient. Global oil consumption, for example, is at record levels and the expectation is that demand could increase by another 1.4 million barrels a day in 2017. India could be poised to be the next major source of consumption stimulating the next growth cycle.

Deep Corporate Restructuring Should Continue to Improve Overall Performance

The supply response to the massive, multi-year decrease in capital investment is already apparent and is expected to become ever more so with lasting production implications. However, the deep corporate restructuring that we have seen over the last couple of years will likely continue to improve both operating and financial performance.

We think that it is important to reemphasize that when it comes to the deep corporate restructuring that has occurred and continues to be undertaken in response to weak commodity prices, companies have responded in an almost unprecedented fashion.

Of particular note has been the unanimity of the response, even if some companies have been slower than others in their responses, and the breadth and depth of the collective response. It has involved not just staff reductions and cost cuts of the low-hanging fruit variety, but companies have, also, markedly used all the restructuring tools at their disposal, including a much more nuanced approach to high-grading personnel and capital spending, the pursuit of enhanced technological solutions to operating expenses, and a "no-sacred-cows" approach to asset rationalization. Critically, since debt levels had raised existential risks, companies unabashedly pursued an all-of-the-above approach to balance sheet repair, including the elimination of dividend distributions and share repurchase programs, as well as issuing equity and using other, novel, financial engineering. In our view, this could lead to much stronger operational and financial results as companies emerge from this historical downturn. We continue to believe that Glencore,3 one of the strategy's largest holdings, provides a prime example of such a response, and of its effectiveness.

Our investment philosophy compels us to look for long-term growth and the structural enhancement in intrinsic value in the companies in which we invest. Even in today's market conditions, this continues to be one of our guiding tenets. Since we remain convinced that positioning our portfolios for the future, and not just reacting to current circumstance, is of paramount importance, our focus across the sectors in which we invest remains on companies that can navigate commodity price volatility and help grow sustainable net asset value.

Download Commentary PDF with VanEck Global Hard Assets Fund specific information and performance

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Opportunity Exists in Emerging Markets Bonds https://www.vaneck.com/blogs/emerging-markets-bonds/opportunity-in-emb/ Emerging markets bonds posted impressive results in 2016 despite shifts in investor sentiment throughout the year. Recent volatility may provide value opportunities in the near term.

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VanEck Blog 1/23/2017 12:00:00 AM

Emerging markets bonds endured several big shifts in investor sentiment over the course of 2016 but still posted impressive performance for the year. This resiliency is worth noting as we face high levels of uncertainty and a wide range of potential outcomes for 2017. Looking back, a challenging January 2016 was followed by record breaking flows into emerging markets bonds. During the second and third quarters of 2016, encouraged by an intensifying of central bank accommodation, investors resumed a search for yield and risk, which only grew stronger after the U.K.'s June Brexit referendum. Prevailing sentiment was turned on its head on November 8, U.S. election day, when market expectations for U.S. growth became “great again,” and emerging markets bonds were among the hardest hit asset class due to higher yields, a stronger U.S. dollar, and fears over what Trump foreign trade and tax policies might mean for emerging markets. The chart below shows the post-election climb in yields. Additional shifts in sentiment, and volatility, are likely to continue as we head into the beginning days of the new Trump administration. We believe that these conditions may present attractive entry points to add exposure to various sectors of emerging markets debt.

Yield to Maturity (%)
December 2011 – December 2016

Yield to Maturity (%) Chart

Source: FactSet as of 12/31/2016. All performance quoted represents past performance. Past performance is no guarantee of future results. Not representative of fund or fund indexes. Indexes are unmanaged and are not securities in which an investment can be made. Please see definitions at the end.

Reflation or Reversal?

With 2016 behind us, the global reflationary story is likely to dominate in the near term. This view has been supported by positive macro figures out of the U.S. and Europe and signs of higher inflation. Commodity prices, as measured by the Bloomberg Commodity Index, were up more than 11% in 2016 – the first positive year since 2009. Oil prices were up almost 50% for the year, with WTI (West Texas Intermediate) at approximately $54 per barrel by yearend. While rising yields and the stronger U.S. dollar are headwinds for most emerging markets bonds sectors, rising commodity prices provide support for fundamentals in a variety of sectors and the local currencies of commodity exporting countries.

A big question now is: Are the market's bullish growth and earnings expectations fully priced in, or overly optimistic? The risk of a market reversal has increased, given the run-up in interest rates and the U.S. equity market. A partial unwind of the “Trump-trade” may have occurred in the second half of December, with the 10-year U.S. Treasury rate down 25 basis points by early January, and the U.S. dollar experiencing a slight decline after making record highs following the election. Further reversal may benefit local currencies and longer duration hard currency bonds.

All Emerging Markets Bonds Sectors Up in December

All emerging markets bonds sectors posted positive performance in December, following the very weak performance in November. For the full calendar year 2016, many sectors posted strong results. Hard currency sovereign bonds returned 1.3% in December, ending the year with a 10.2% gain. The yield spread of higher quality sovereign bonds (as measured by the J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index) versus investment grade U.S. dollar denominated corporate bonds ended the year at 90 basis points, an attractive pickup indicative of the increased value in emerging markets bonds following the U.S. election. Emerging markets corporate bonds returned 9.2%, with high yield returning 16.1% for the year, driven by both spread tightening and carry, and provided a pickup over U.S. high yield bonds of 107 basis points on an option-adjusted-spread basis. This sector may benefit if expectations of global reflation come to fruition. Despite significant weakness in local currencies in November, local currency bonds returned 1.9% for the month and 9.9% for the year. Brazil, Russia, and South Africa were the strongest contributors for the year with significant gains from both local rates and currencies, while the segment overall attributed almost all of its return to rates. Not surprisingly, Mexico was the biggest laggard due to significant weakness in its currency. Turkey was another notable laggard in 2016, particularly its local currency bonds. An increasingly authoritative and less secular government, emboldened by a failed coup attempt, has forced a consistent ratcheting down of Turkey's fundamental prospects and the country lost its investment grade rating in 2016.

Looking Ahead at the Buying Opportunities

The potential risks in the near to medium term include uncertainty around the Trump administration's agenda, the continued rise of populism globally, concerns regarding Chinese currency and asset quality concerns, and the health of European banks (as we were reminded in December with Italy's bailout of Monte dei Paschi). Greece may also come back into the headlines this year, as austerity-weary citizens and politicians become less cooperative with creditors and the threat of an EU exit re-emerges. However, we believe that the different segments of emerging markets bonds provide opportunities in 2017. From a valuation standpoint, yields and spreads on local and hard currency sovereign bonds, respectively, are above five-year averages. Given recent outflows, which moderated in December, technicals do not appear unfavorable. More importantly, economic growth and external positions continue to improve and there are signs of fiscal discipline and structural reforms, particularly in Latin America. We believe that the wide range of potential outcomes for 2017 should be viewed as a pre-condition for market volatility and shifting sentiment. However the increased value in emerging markets bonds may provide an attractive entry point for investors, and a contrarian approach may lead to more attractive buying opportunities.

 

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Improved Sentiment is Good for Emerging Markets https://www.vaneck.com/blogs/emerging-markets/improved-sentiment/ We are tending to view the global macro environment favorably, and see a distinct improvement in global growth, with better sentiment indicators and improving analyst earnings revisions.

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VanEck Blog 1/17/2017 12:00:00 AM A New Era of Protest Against the Political Elite?

2016 was a year of many twists and turns in global macroeconomics and politics. We started the year with intense speculative pressure about the vulnerability of the Chinese economy and currency. The midyear June 23 U.K. Brexit vote to leave the European Union was a shock to most, and this combined with the unexpected U.S. election results, is evidence that we might be entering a new era of popular protest against the political elite.

While there were several quite important emerging markets events in the fourth quarter of 2016 in India, Turkey, and South Africa, for example, none of these events were as significant to the quarter's performance of global risk assets as the historic outcome of the U.S. presidential election, which had significant reverberations in currencies and rates.

Market Response to Election Tough on Emerging Markets

Since Trump's win on November 8, U.S. Treasury yields, the U.S. stock market, and the U.S. dollar have all risen sharply. Most of this market response has been unhelpful to emerging markets. Since November, exporters of goods from emerging markets sold off hard (and then recovered somewhat). Emerging markets currencies also depreciated quite sharply against the stronger U.S. dollar, wiping out most of the emerging markets' pre-election outperformance over the U.S. and other developed markets. Ultimately, however, at VanEck we invest in emerging markets businesses that face and benefit from long-term structural trends. Share prices may be affected by short-term volatility and strategy flows, but in the longer term we have always believed that exceptional businesses that enjoy a strong competitive advantage and that are managed by smart, competent men and women will be winners.

Recent Period Favored Large-Cap Value, Rather Than Smaller-Cap, High-Quality Growth

We have a distinct approach to emerging markets investing, which has generally served long-term investors well over a sustained period of time. Nevertheless, from time to time, there can be periods where our approach is not in favor, and large-cap (often state owned) cyclicals take the lead in emerging markets. We have just moved through such a period, and underperformance in this period is naturally inherent in our philosophy, style, and process. Large-cap value which, in many cases, crosses over with cyclical sectors (materials and energy) will always have periods of outperformance over growth. Our sense is that we are far closer to the end of this transitional period than the beginning, and we have focused over the past year on positioning in emerging markets companies that will benefit when regime change means investors once again favor high-quality growth over low-quality, large-cap cyclicals.

4Q'16 Emerging Markets Equity Strategy Review and Positioning

At a country level, stock selection in Peru, the Philippines, and Thailand helped the relative performance of our emerging markets strategy in 2016. Conversely, exposures in Brazil, China, and Russia, hurt the strategy's relative performance most. In the case of Russia, we are typically underweight this very cyclical and generally poor quality equity market which rallied strongly post-U.S. election, and on the back of stronger commodity prices. China was a poor relative performer throughout 2016, although the doomsday scenario forecast by many did not materialize. In fact, China's growth has turned out to be a little better, rather than worse than expectations, and many forward indicators are predicting at least a stable outlook. However, multiples remain depressed, and this leads us to believe that China is likely to do better for our strategy in 2017.

In terms of industry sectors, our stock selection in consumer sectors in emerging markets helped the strategy in 2016 despite weakening performance at yearend from sectors impacted by the uncertainties over the future of global trade that followed the U.S. election. On the other hand, our exposure to financials in emerging markets, in addition to the strategy's structural underweight in energy and materials led to poor relative performance in terms of asset allocation, as both sectors (energy and materials) continued to do well. Touching a little on energy and materials, we would posit that much of the outperformance has probably taken place. We do see supply discipline in the shorter term but we continue to believe that in the medium and longer term, not being exposed to these sectors is advantageous.

A Distinct Improvement in Global Growth and Sentiment

Entering 2017, emerging markets face a significant degree of uncertainty, with some clearly identifiable risks, both positive and negative. The complicated, and uncertain, interplay of reflationary policies, interest rates, and the U.S. dollar, is difficult to predict. Likewise, the policy actions of the new U.S. administration, although potentially very different from campaign rhetoric, will influence outcomes for emerging markets. Reflation, stagflation, and the return of deflation are all plausible. We are tending to view the global macro environment favorably. We see a distinct improvement in global growth, with better sentiment indicators and improving analyst earnings revisions. We need to carefully monitor further U.S. dollar strength, which is generally a negative for emerging markets investors. Disruptive trade and tax policies also have the potential to be significant headwinds.

India's Temporary Dislocations

Turning to some country specifics: in India the market struggled in the fourth quarter as investors came to grips with some significant government moves, including "demonetization". This is the process whereby certain local currency notes (1,000 rupees and 500 rupees) were invalidated overnight, and replaced with new notes. One of the intentions behind this move was a push to formalize more of the economy. This ought to have a long-term positive impact for the economy, but it has certainly created some temporary dislocations. We have used this period of investor disfavor to reposition and optimize the strategy's portfolio for where we believe the opportunities will be in the future, rather than where short-term sentiment is currently.

China Offers Mispriced Opportunities in Specific Sectors

The outsized performance of value (which has become the momentum trade in emerging markets), has meant that the valuations of our consistent growers have become relatively more attractive. In addition, as they steadily compound earnings, their absolute valuations are clearly improving as well. We are finding tremendous value in currently out of favor markets such as Indonesia, the Philippines, and China and will continue to allocate capital to structural growth businesses that are most attractively priced. We expect 2017 yet again to be a year where the outsized predictions of "perma-bears" in China prove to be wrong. This does not mean that there are not significant challenges, but we are confident that there are also significantly mispriced opportunities in specific sectors. We are not in the camp of a disorderly depreciation of the Chinese currency.

Work Still Needs to Be Done in Brazil

Brazil's outlook improved post-impeachment. However, we believe that, in general, Brazil's equity market is fully discounting that improvement while there remains some very significant work to be done in terms of the social security and pension systems. Meanwhile, real activity indicators are sluggish, to say the least.

Vulnerability in certain emerging markets countries has been reflected in some very weak currencies. Mexico certainly bore the brunt of that in 2016, being particularly impacted by the shifting political winds in the U.S. The fear is, of course, that foreign direct investment is significantly impacted. In Turkey, the lira has also been very weak. In this case, it also reflects concern about domestic and regional politics. Turkey has vulnerability to a weaker currency through heightened inflation and elevated foreign currency debt. Our stock selection in Turkey reflects our medium-term anticipation of further currency weakness.

Download Commentary PDF with Fund specific information and performance  

For a complete listing of the holdings in VanEck Emerging Markets Fund (the "Fund") as of 12/31/16, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

IMPORTANT DISCLOSURE  

This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

The views and opinions expressed are those of the speaker(s) and are current as of the posting date. Videos and commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results.

Please note that Van Eck Securities Corporation offers investment portfolios that invest in the asset class(es) mentioned in this commentary. The Emerging Markets Equity strategy is subject to the risks associated with its investments in emerging markets securities, which tend to be more volatile and less liquid than securities traded in developed countries. The Emerging Markets Equity strategy's investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation. The Emerging Markets Equity strategy is subject to risks associated with investments in derivatives, illiquid securities, and small or mid-cap companies. The Emerging Markets Equity strategy is also subject to inflation risk, market risk, non-diversification risk, and leverage risk. Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information. Please read them carefully before investing.  

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.

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2016: A Strong Year for Moats https://www.vaneck.com/blogs/moat-investing/2016-strong-year-for-moats/ U.S. domestic moat companies finish strong in 2016 and international moats bounce back in the fourth quarter. 

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VanEck Blog 1/12/2017 12:00:00 AM

For the Year Ending December 31, 2016

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") finished the year well ahead of the S&P 500® Index (22.37% vs. 11.96%). Several companies in the U.S. Moat Index stood out in 2016 to boost performance. Internationally, Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index") rebounded in the fourth quarter to outpace the MSCI All Country World Index ex USA for the period (5.77% vs. 4.50%).

U.S. Domestic Moats: Persistent Outperformance

Strong stock selection benefited the U.S. Moat Index in 2016 and led to its strongest calendar year of outperformance compared to the S&P 500 Index since 2009. The performance gap first began to widen in February and then increased throughout the remainder of the year. Merger and acquisition (M&A) activity played a major role in the performance of several constituents. The acquisition of LinkedIn Corp. (LNKD US, +73.26) by Microsoft Corp. (MSFT US) provided a catalyst which made LinkedIn the strongest performing constituent stock during its inclusion in the Index. Furthering the M&A theme, St. Jude Medical, Inc. (STJ US, 41.05%) was also a standout while in the Index due to an acquisition announced by Abbott Laboratories (ABT US). Additionally, Time Warner, Inc. (TWX US, +52.24%) benefited while in the Index from the announced AT&T (T US) merger.

Several firms performed well on their own merits while in the U.S. Moat Index in 2016. Spectra Energy Corp (SE US, +31.94%) was a standout early in the year before exiting in the Index as the only energy sector constituent for 2016. All told, strong performance was driven primarily by the information technology, consumer discretionary, industrials, and financials sectors. By contrast, no single sector detracted from Index performance in 2016.

Although positives outweighed negatives, the U.S. Moat Index did not end the year unscathed. Despite a strong rebound following the U.S. elections, several biotech firms were unable to erase losses from earlier in the year and ended the period in the red while in the Index: Biogen, Inc. (BIIB US), Gilead Sciences, Inc. (GILD US), and Allergan plc (AGN US).

International Moats: Fourth Quarter Bounce Back

The International Moat Index struggled throughout the first half of the year relative to the broad international stock market, particularly following the Brexit vote in June. Exposure to British firms such as Lloyds Banking Group (LLOY LN, -22.88%) were a drag on the portfolio. Much of that changed following the U.S. elections as global financial firms rallied amid expectations for a more accommodating regulatory environment in the U.S. Financials finished the year as the second largest contributor to International Moat Index performance, trailing only the consumer discretionary sector.

Gaming companies were very strong performers from the consumer discretionary sector. MGM China Holdings Ltd (2282 HK, +45.20%) was the top performing stock in the Index in 2016, and others such as Sands China Ltd. (1928 HK, +8.90%) and Genting Singapore plc (GENS SP, +8.44%) performed well for the year. Other consumer discretionary names also posted notable performance while in the Index, such as, luxury brand company Kering SA (KER FP, +42.61%) and car maker BMW (BMW GR, +20.35%).

The real estate, healthcare, and consumer staples sectors were the three sectors which detracted from International Moat Index performance for the year. While Canadian, French, and Australian firms provided the top performing country exposure, China exposure though Hong Kong-traded real estate firms and auto maker Dongfeng Motor Group (489 HK, -26.90%) were among the top detractors for the year.

(%) Month Ending 12/31/16

Domestic Equity Markets

International Equity Markets

(%) As of 12/31/16

Domestic Equity Markets

International Equity Markets

(%) Year Ending 12/31/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
LinkedIn Corporation Class A
LNKD US
73.26
Time Warner Inc.
TWX US
52.24
St. Jude Medical, Inc.
STJ US
41.05
Harley-Davidson, Inc.
HOG US
40.84
Spectra Energy Corp
SE US 31.94

Bottom 5 Index Performers
Constituent Ticker Total Return
American Express Company
AXP US
3.81
Biogen Inc.
BIIB US
-6.91
Gilead Sciences, Inc.
GILD US
-18.65
Allergan plc
AGN US
-23.09
Stericycle, Inc.
SRCL US
-24.26

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
MGM China Holdings Limited 2282 HK 45.20
Kering SA KER FP 42.61
Bank of Montreal BMO CN 32.64
Canadian Imperial Bank of Commerce CM CN 29.63
Spotless Group Holdings Ltd SPO AU 21.20

Bottom 5 Index Performers
Constituent Ticker Total Return
HSBC Holdings plc HSBA LN -19.30
Cameco Corporation CCO CN -21.15
Credit Agricole SA ACA FP -22.46
Lloyds Banking Group plc LLOY LN -22.88
Dongfeng Motor Group Co., Ltd. Class H 489 HK -26.90

View MOTI's current constituents

As of 12/16/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
CVS Health Corporation CVS US
Guidewire Software GWRE US
Bristol-Myers Squibb BMY US
Zimmer Biomet Holdings Inc ZBH US
TransDigm Group TDG US
Mead Johnson Nutrition Co MJN US
Mondelez International Inc MDLZ US
Pfizer Inc PFE US
Patterson Cos Inc PDCO US
Medtronic plc MDT US
Lowe's Cos Inc LOW US

Index Deletions
Deleted Constituent Ticker
The Bank of New York Mellon Corp BK US
State Street Corp STT US
US Bancorp USB US
Western Union Co WU US
Microsoft Corp MSFT US
LinkedIn Corp LNKD US
CSX Corporation CSX US
Norfolk Southern Corp NSC US
Harley-Davidson Inc HOG US
Tiffany & Co TIF US
Time Warner Inc TWX 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
Cemex SA CPO Mexico
KION Group AG Germany
Cheung Kong Property Holding Ltd Hong Kong
KT Corp South Korea
GlaxoSmithKline United Kingdom
Sun Hung Kai Properties Ltd. Hong Kong
CSL Ltd Australia
Iluka Resources Ltd Australia
Ramsay Health Care Ltd Australia
Orange France
ENN Energy Holdings Ltd China
Telefonica Brasil S.A. Brazil
KDDI Corp Japan
China Telecom Corporation Ltd. China
Sina Corp (Caymans) China
Tata Consultancy Services Ltd India
Nippon Tel & Tel Corp Japan
Singapore Exchange Ltd Singapore
GEA Group AG Germany
China Mobile Ltd. China
Industrial and Commercial Bank of China Ltd China
Fisher & Paykel Healthcare Corporation Ltd New Zealand
Telstra Corp Ltd Australia
Infosys Ltd India
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Danone France
DuluxGroup Ltd Australia
Bureau Veritas SA France
Carsales.com Ltd Australia
William Demant Hldg Denmark
Tencent Holdings Ltd. China
Nidec Corp Japan
Kao Corp Japan
Vicinity Centres Australia
Airbus Group France

Index Deletions
Deleted Constituent Country
Bank of Montreal Canada
Canadian Imperial Bank of Commerce Canada
National Bank of Canada Canada
Power Financial Corp Canada
Cameco Corp Canada
Lloyds Banking Group Plc United Kingdom
Henderson Group Plc United Kingdom
Carnival Pl United Kingdom
Kingfisher United Kingdom
Petrofac United Kingdom
National Australia Bank Ltd Australia
Westpac Banking Corp Australia
AMP Ltd Australia
Commonwealth Bank Australia Australia
Platinum Asset Management Limited Australia
Computershare Ltd Australia
BNP Paribas France
Kering France
Schneider Electric SE France
Carrefour SA France
Nordea AB Sweden
Svenska Handelsbanken Sweden
United Overseas Bank Singapore
Genting Singapore Plc Singapore
Julius Baer Group Switzerland
Roche Hldgs AG Ptg Genus Switzerland
Linde AG Germany
Bayer Motoren Werke AG (BMW) Germany
Wynn Macau Hong Kong
Sands China Ltd. Hong Kong
MGM China Holdings Ltd Hong Kong
Teva Pharmaceutical Industries Israel
SoftBank Group Corp Japan
Wipro Ltd India
Koninklijke Philips Elec NV Netherlands

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



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How to Interpret January Effect and Munis https://www.vaneck.com/blogs/muni-nation/municipal-bonds-january-effect/ Are muni bonds going to experience the January Effect this year? We think so given what we believe is a unique supply and demand dynamic. 

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VanEck Blog 1/11/2017 12:00:00 AM

Given the passing of 2016 and the advent of a new year, it's time to take a closer look at an enduring, albeit inconsistent, market phenomenon, the "January Effect," and what it may mean for municipal bonds in particular at the start of 2017.

What is the January Effect?

The January Effect is a rise in asset prices often (but not always) observed throughout the month of January. There are a number of theories as to why this happens. A leading hypothesis is that many investors, eager to offset capital gains taxes, engage in tax-loss harvesting at the end of the fiscal year. This can depress asset prices. At the start of the new year, these investors then re-establish positions in the market, pushing up asset prices once again.

As seen in the chart below, in eight out of the last 10 calendar years, both high yield and investment grade municipal bonds have posted positive returns in the month of January.

Municipal Bond Performance: A Look at the "January Effect"
January Month Total Returns 2007-2016

Source: Bloomberg Barclays. Data as of 12/31/16. Index definitions below. Past performance is no guarantee of future results.

The big question now is: Are muni bonds going to experience the January Effect this year? We think so given what we believe is a unique environment.

2017: A Unique Supply and Demand Dynamic in Muni Bonds

Fixed income suffered a bit of a reversal in fortunes after the surprise results of the 2016 U.S. presidential election. Having recorded steady gains throughout the year, by the end of November much of these gains had been erased by continuing uncertainty regarding the president-elect's tax and spending plans as well as the U.S. Federal Reserve's decision to raise the federal funds' rate 0.25% on December 14. However, the resulting precipitous drop in fixed income also served as a tax-loss harvesting opportunity not seen in municipals since 2013.

Add to that the roughly $46 billion worth of calls and maturing bonds that came due at yearend, and there is a tremendous amount of cash (demand) that will need to be redeployed into fixed income this month. Even if half of this cash finds its way back into muni bonds, demand will almost certainly outstrip the current supply expected.

The Outlook for January

Opportunistic tax-loss selling, $46 billion in maturities and coupon payments, and constrained supplies in municipal bonds all point to one thing: the January Effect may be a "slam dunk." This is, perhaps, not all that surprising. As we have seen above, the January Effect for munis has been fairly common.

In this year's case, tax-loss selling at the end of 2016 will likely augment the imbalance in supply and demand. Investors who have taken advantage of tax-loss selling opportunities at the end of 2016 in our view will need to re-establish new positions with limited supply. This could push asset prices higher: a textbook January Effect.

The Bottom Line:

This year's potential January Effect, manifested in a rise in asset prices, could look more pronounced than usual—thanks to a confluence of various factors, most notably investors' need to redeploy an unusually large amount of cash, augmented at the end of 2016 from opportunistic tax-loss selling. The Fed's decision to raise rates also contributed to this tax-loss selling.

We will, however, have to wait for several weeks to see what happens.

1The Bloomberg Barclays Municipal Bond Index is a rules-based, market-value-weighted index engineered for the investment grade tax-exempt bond market. The Bloomberg Barclays High Yield Municipal Bond Index is a rules-based, market-value-weighted index engineered for the below investment grade tax-exempt bond market.

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Fed Hawks Hint at Growth Scenario for 2017 https://www.vaneck.com/blogs/market-insights/fed-hawks-growth-2017/ Improved labor markets have increased inflation expectations and this is giving central banks an excuse to change course.

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VanEck Blog 1/10/2017 12:00:00 AM

Watch Video Video - Fed Hawks Hint at Growth Scenario for 2017  

Natalia Gurushina, Economist

Watch Now  



Central Banks Make a Hawkish Shift

TOM BUTCHER: Natalia, how does the Federal Reserve's December 14 decision to raise interest rates (0.25%) fit into the global monetary policy narrative?

NATALIA GURUSHINA: Even though the Fed was the only major central bank that not just hiked the policy rate but also actually indicated an accelerating base of tightening in 2017, other major central banks appear to be less willing to dig deeper into quantitative easing. They seem to want steeper yield curves and more positive participation from the fiscal side. If you look at the data releases tied to labor markets, for example, which are now creating higher inflation expectations in many parts of the developed markets ― the eurozone, the U.S., and the U.K. ― this is giving several central banks an excuse to start changing course. Given this general shift towards more hawkishness, we think there is a possibility that nominal yields will rise more, that curves will steepen more in developed markets. Also, given that there is a near-term policy divergence between the Fed and other central banks, there is definitely more room for U.S. dollar strength.

U.S. Fed Taking a Wait-And-See Approach to Trump Administration

BUTCHER: What can we surmise about the new administration, the Fed, and future rate hikes?

GURUSHINA: If you look at the latest forecasts, the Fed now expects three full rate hikes in 2017, but the timing of the first move will depend on many factors. One factor might be a change in the composition of the FOMC (Federal Open Market Committee) because there is a chance it may become a bit more dovish. With regard to the new Trump administration's plans, thus far they have not seemed to have a major effect on the Fed's decisions, as we haven't seen any impacts on macroeconomic forecasts. Chair Yellen was quite explicit in maintaining a wait-and-see attitude towards the new administration's economic agenda. What we do know for sure is that market expectations of fiscal stimulus in the U.S. are quite high.

Donald Trump's fiscal agenda is likely to find sympathetic ears in Congress, given that it is now controlled by the Republican Party. We also know that the U.S. economy seems to be in the later stages of a positive business cycle, and stimulating economy in this environment might be inflationary. Whether we experience a reflation-type or a stagflation-type outcome, we cannot predict yet, but it will become clear later on. High inflation pressure might force the Fed to adopt a more aggressive policy stance. The reflation story seemed to be getting some traction in the first quarter, given that we have seen more positive surprises in the developed markets and this has pushed market-based inflation expectations higher. I would say that a first quarter 2017 hike is probably on the table. What is interesting, however, is that apparently markets still don't really believe the Fed, and they are more dovish than the Fed, especially in terms of expectations for 2018 and 2019. If by any chance markets catch up to the Fed, or they decide that the Fed is behind the curve with the risks of more duration sell-off in the U.S. dollar appreciation.

The Global Growth Outlook Remains Tepid

BUTCHER: How does this impact the outlook for both U.S. and global growth?

GURUSHINA: The global growth outlook is not very impressive, in my opinion, and this is despite the fact that we are now sitting on a big pile of debt globally. Here in the United States, there is now a prospect of fiscal stimulus, and this should improve growth expectations. There is also a chance here in the U.S. that there will be structural changes, deregulation, tax reform. If all these pro-growth policy blocks are implemented, this can improve confidence. I view this as positive for growth in the near term, as well as lifting the long-term potential for growth.

BUTCHER: Do you see any headwinds to this pro-growth scenario?

GURUSHINA: Two potential headwinds are important. First is higher interest rates in the U.S., when the amount of leverage in the economy is quite high. This is not just in the public sector, but in the business sector as well. To provide one example, the business debt-to-GDP ratio is now almost as high as in the run-up to the crisis. Another potential headwind, as a mentioned earlier, is that the Fed might be forced to be more aggressive in its policy response, if a combination of fiscal stimulus and less slack in the economy fuel inflation.

But Stronger Growth in the U.S. is Good for Emerging Markets

In terms of emerging markets, stronger growth in the U.S. is generally good for emerging markets, especially if this expansion is accompanied by higher commodity prices. But we see three uncertainties. Point number one is if the Fed continues to tighten, then there is less room for emerging market central banks to accommodate. Point number two is if U.S. dollar strength becomes excessive, capital flows through emerging markets might be curbed, and it will make it more expensive to service debt, which will weigh on growth. Finally, and this will be unique to the new Trump administration, is that we need more clarity on the global trade agenda. This will affect not just growth in emerging markets, but also the profitability of the U.S. corporates, and therefore, the U.S. growth.

 
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Commodities 2017: Macro Events and Tighter Supplies Support Rally https://www.vaneck.com/blogs/natural-resources/commodities-2017-macro-events-tighter-supplies-rally/ We are very constructive on the long-term outlook for commodities. 2016 marked the first year in what could be a multi-year cyclical positive trend.

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VanEck Blog 1/9/2017 12:00:00 AM

Watch Video Video - Commodities 2017: Macro Events and Tighter Supplies Support Rally  

Roland Morris, Portfolio Manager and Strategist

Watch Now  


 

Outlook for Commodities in 2017

TOM BUTCHER: What major game-changing events have taken place since we last spoke in August ( Video: Why Allocate to Commodities)? What is your outlook for 2017?

ROLAND MORRIS: 2016 was an important turning point for the natural resources space and commodities in general. We felt that the first quarter of 2016 marked an important cyclical low for natural resources and the commodities sectors. Obviously, we had an OPEC (Organization of the Petroleum Exporting Countries) agreement in late November, which was somewhat of a surprise. There was also the major news of the U.S. presidential election.

Huge Reduction in Future Supply Expected to Drive Prices

MORRIS: Our outlook hasn't changed fundamentally and we think the positive trends in most commodities markets will continue as we enter into 2017. This is our basic fundamental view surrounding what we believe has been a huge reduction in future supply. The story we have been talking about is the significant reduction in investment and production across commodities, such as energy, and some of the important diversified metals — copper in particular. (We have addressed this in several blog posts over the past year, including the most recent Metals Supply.)

OPEC and U.S. Election Impact Short Term

MORRIS: While our macro view on tighter supplies hasn’t changed, the November OPEC agreement and the U.S. presidential election have changed our short-term outlook somewhat significantly. The OPEC agreement directly goes to our view in the energy market, which has been rebalancing, and it is probably in balance now as we speak. But this OPEC agreement to cap production accelerates that process, and we expect that we will start to see a drawdown in global oil supplies rather quickly in this New Year. Tighter supplies will continue to support oil prices. On the other side of the coin, we do not expect oil prices to appreciate dramatically in 2017 because U.S. producers are starting to increase drilling activity, which should bring on additional U.S. production in the second half of this year, and this should temper the upside potential for energy markets.

Post-Election Changing Sentiment Could be Significant Demand Driver

MORRIS: It seems that when we think about Donald Trump, it is all pro-growth policies. Investors clearly have changed their outlook on the growth potential of the U.S. There's been a significant jump in consumer and business sentiment, and that gets to Trump’s pro-growth policies and his views that the economy needs to be deregulated. This is encouraging for business, and the change in sentiment alone could improve the growth outlook. This will help the demand side for commodities and could end up being a significant demand driver.

BUTCHER: Are you speaking about the expectation for increased infrastructure spending?

MORRIS: Yes, that will certainly help at some point. It is one of the concepts behind investors taking a more positive view towards natural resources demand. I think the one clear thing that will happen, which will be very good for the U.S. energy industry, is some relief on the regulatory side as far as permitting for infrastructure, for pipelines and whatnot. That could be a very important development for the entire U.S. energy industry because it could reduce costs. There has been a big roadblock in permitting for needed infrastructure pipelines, which are the safest way to transport energy products. I think it will end up being a fairly good thing, especially for natural gas, in terms of the industry’s ability to move energy where it needs to be, as well as for important pipelines to move oil as we increase our production.

Potential Headwinds: Strong U.S. Dollar and Higher Interest Rates

BUTCHER: What do you see as some of the potential headwinds in 2017?

MORRIS: With some of those positive outlooks for global growth and specifically, U.S. growth, come some negative aspects. The strength in the U.S. dollar in the first weeks post-election was dramatic. That, as you know, can act as a headwind for commodity demand. It puts some pressure on emerging markets economies, and that can generate concerns about the growth outlook for emerging markets economies. A strong dollar is also a headwind for gold, and we have seen a big pullback in gold prices since the election. Additionally, the other concern that stronger growth outlooks bring are higher interest rates.

BUTCHER: Would you elaborate on your concerns about higher rates? Does this impact your long-term view?

MORRIS: There is a chance that in 2017 that we get a mismatch between when stimulative policies will impact the U.S. economy and when higher interest rates, which we have already seen, and the stronger U.S. dollar, could dampen economic activity. I do see a possibility of a short-term period in which we experience disappointing U.S. economic growth before the growth policies can impact growth, which is more likely to occur in 2018. This is a potential near-term headwind.

Long Term: A Multi-Year Cyclical Bull Market

Long term, we continue to be very constructive. We think the supply side has been constrained. We do think global growth will continue to chug along, so we are not concerned about the demand side. As we look at it, we think 2016 marked the first year in what could be a multi-year cyclical positive trend for the natural resources and commodities sectors.

 
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Strong Year for Gold Despite Post-Election Stress https://www.vaneck.com/blogs/gold-and-precious-metals/strong-year-despite-post-election/ Despite December’s disappointing results, 2016 was a strong year and a major turning point for gold investments. Gold bullion gained 8.6% and gold equities rose more than 50% for the year.

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VanEck Blog 1/6/2017 12:00:00 AM

December Consolidation in Gold Market on U.S. Dollar Strength

It looks as if gold is now consolidating the losses experienced since the November U.S. presidential election. Gold reached its lows for the month of December at $1,137 per ounce following the Federal Reserve's (the "Fed") December 14 announcement to increase the targeted federal funds rate1 by 25 basis points. The Fed's decision also caused the U.S. Dollar Index (DXY)2 to jump to new highs. Gold finished the month at $1,152.27 per ounce, down $20.98 (1.8%). Net redemptions in gold bullion exchange traded products (ETPs) continued their post-presidential election slide, although the pace tapered at yearend. Since the Trump victory, there have been net outflows of 7.2 million ounces in global bullion ETPs, bringing net inflows for the year to a still impressive 11.8 million ounces.

Gold stocks were also in consolidation mode, as the NYSE Arca Gold Miners Index (GDMNTR)3 gained 1.1% and the MVIS Junior Gold Miners Index (MVGDXJTR)4 fell 2.0%.

2016 Should be Viewed as a Strong Year and a Turning Point for Gold

Despite December's performance results, investors should keep in mind that 2016 overall remained a strong year and a major turning point for gold investments, as we discuss in more detail below. Gold bullion gained $91 per ounce or 8.6% in 2016 for its first annual gain in four years. But gold stocks stole the show, with gains of 54.4% for GDMNTR and 75.1% for MVGDXJTR.

Although Ignored, Market Events Could Add Long-Term Support to Gold

There were two unrelated developments in December that the markets largely ignored which we believe could have positive implications for gold in the longer term. On December 4, Italian voters rejected a constitutional referendum that effectively became a vote of no-confidence for Prime Minister Matteo Renzi, who promptly resigned. This is the latest in a string of populist victories around the globe driven by voters frustrated with established political parties that have been unable to bring policies that generate needed jobs. Instead, post-crisis policies have brought an unprecedented coordination of regulations, monetary experiments, austerity, and debt expansion. The outcome of the referendum has empowered opposition parties in Italy who question whether the country should remain in the European Union (EU). The implementation of Brexit in 2017 poses significant risks to the European economy and the Italian referendum is further evidence of a broader movement that undermines the EU. Important elections will be held in the Netherlands (March 2017), France (April 2017), and Germany (August - October 2017). Gold could benefit if risks of an EU breakup increase.

On December 5, a second potentially favorable development for gold occurred when the Shari'ah Standard on Gold (the "Standard") was released by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).5 The Standard, for the first time, sets out specific rules for the use of gold as an investment in the Islamic finance industry. Until now, there have been no such rules and this has led to confusion over whether or not Islamic households are permitted to invest in gold. Those who wanted to own gold were compelled to invest only in jewelry. The Standard also rules that it is permissible to invest in gold mining stocks. This opens a significant segment of the global population that already has an affinity for gold to initiate potential investments in gold bars, coins, ETPs, and stocks.

Gold Shares Outperform in 2016

There are several reasons for the spectacular performance of gold stocks in 2016 including:

  • A rebound from 2015 bear market levels that were very oversold as the industry fell out of favor with investors who had been avoiding the sector, driving valuations to record lows
  • Gold companies impressed investors with their cost controls, operating results, and overall financial discipline
  • Earnings leverage to the gold price

Strong performance like what was experienced in 2016 is common at major turning points in the gold market. For example, the GDMNTR gained 80% in 2002 and in 2009 the Index rose 37%.

Be Wary of Consensus Opinion and Short-Term Overreaction

If 2016 taught us anything, it is that whatever the consensus says is going to happen in economics, investments, or politics in the coming year is likely to be wrong. This year the Fed is again showing optimism towards the U.S. economy, guiding for three rate increases in 2017. The market responded in December by selling gold and driving the U.S. dollar higher. The Fed, however, has had a dismal forecasting record and we see no reason to believe that 2017 will be any different. At this time last year, the Fed was guiding for four rate increases in 2016, yet there was only one.

The Trump honeymoon with the stock market is in full bloom, as the financial media prepares to celebrate should the Dow Jones Industrial Average (DJIA)6 cross 20,000 points. The stock market is reflecting a consensus for robust economic growth, and the Trump administration certainly has the potential to implement policies that promote growth. However, it seems the market is ignoring many potential risks the new administration may face. These include attempting to change trade treaties, immigration policies, Democrats and deficit hawks in Congress, the national debt, and Fed tightening. Potential moves by China or Russia, disarray in the EU, and strife the Middle East could also impact the administration's efforts. We believe many of these risks will surface in 2017, reversing the positive sentiment in the stock market and U.S. dollar to gold's benefit.

Forming the Base of a Long-Term Gold Bull Market

Through most of 2016 we had been very bullish on gold, believing it had embarked on a new bull market. This belief was based on fundamentals, which included unprecedented levels of peacetime sovereign debt and monetary policies, such as quantitative easing7 and negative rates, which distort markets and pose systemic risks. While we were premature in forecasting a new gold bull market, we continue to believe these risks will ultimately drive gold to new highs. However, the turn the markets took following the U.S. presidential election took us entirely by surprise. The positive sentiment towards gold proved to be fickle and it appears the market will need more substantial evidence that the risks we see coming are in fact imminent.

We now characterize 2016 and 2017 as a base-forming phase for gold, probably a precursor to a bull market. The bear market trend from 2011 to 2015 has clearly been broken and 2016 showed us that investors are becoming quite skittish of systemic financial risks.

The chart below shows where gold might be in the context of similar markets of the past. Gold has a strong negative correlation8 with the U.S. dollar. This is shown by the peaks and troughs on the gold chart roughly correlating with the troughs and peaks respectively on the U.S. dollar chart. The U.S. dollar has been in a bull market since 2011 that is now similar in magnitude to bull markets of the early eighties and late nineties. These all correspond to bear markets for gold. As the U.S. dollar approached its peaks in 1985 and 2001, gold formed a double-bottom before embarking on new bull markets. In 1985, gold began a cyclical bull phase within a longer-term secular bear market. In 2001, gold began a historic secular bull market. It now looks like December 2015 was the first low for gold in this cycle. What remains unclear is whether the second low in a double-bottom was set in December 2016 or whether there is further weakness to come. In any case, it looks like gold is forming a base and historical analysis suggests that downside is limited.

The Strong Negative Correlation Between Gold and the U.S. Dollar
Period 1973 to 2016

The Strong Negative Correlation Between Gold and the U.S. Dollar Chart

Source: Bloomberg. Data as of December 30, 2016.


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The New Year May Bring Opportunities in Emerging Markets Bonds https://www.vaneck.com/blogs/emerging-markets-bonds/new-year-may-bring-opportunities/ We believe there is a strong case for a strategic, long-term allocation to emerging markets bonds.

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VanEck Blog 1/4/2017 2:24:37 PM

The emerging markets bonds market has evolved significantly over the past two decades, growing in both size and diversity. The market's growth reflects the dynamic structural reforms that have transformed many emerging markets economies and helped boost economic growth. Also, investor understanding and appetite for emerging markets bonds has increased significantly as more investors recognize the asset class's potential income and diversification benefits.  

In this five part blog series (read my previous post, Steady Climb of Emerging Markets Ratings Challenged in Recent Years), we advance the case for investing in emerging markets bonds and identify some of the potential opportunities the asset class may offer in today's market environment.  

Current Opportunities in Emerging Markets Bonds

We have previously discussed the tremendous diversity within the emerging markets bond market, the structural reforms many countries have undertaken, and the improving fundamental outlook (particularly versus most developed markets). Because of these factors, we believe there is a strong case for a strategic, long-term allocation to emerging markets bonds within a diversified portfolio.

However, emerging markets asset classes can be significantly affected by changes in market sentiment, given their perceived risk. The selloff following Donald Trump’s surprise U.S. presidential win is a recent example of this type of activity. Following nine months of steady inflows into emerging markets bonds, as investors sought out attractive yields relative to the asset class’s improving outlook, in November investors pulled money out of emerging markets bonds amid speculation about what a Trump presidency might mean for developing markets.

Be Opportunistic Amid the Volatility

We believe that the long-term case for emerging markets bonds remains intact, but also expect volatility in the coming months until there is clarity on President-elect Trump's priorities and his ability to implement them. Periods of volatility may provide attractive entry points for investors to add exposure. In the near term, the sectors within emerging markets bonds may perform very differently based on how markets react to the new administration's first 100 days and beyond. Depending on an investor’s opinion of what may transpire, we believe the asset class offers several ways to express that view.

Lift off - credit outperforms: The "Trump trade" has been characterized by higher interest rates across the curve and a stronger U.S. dollar due to expectations of accelerating growth and inflation. If this continues, credit sensitive asset classes such as high yield emerging markets corporate bonds may benefit. As of December 31, 2016, this sector provided a yield of 6.95%, a 78 basis points pickup over U.S. high yield corporate bonds (as measured by the BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index and the BofA Merrill Lynch US High Yield Index), along with a shorter duration which generally reduces sensitivity to changes in interest rates.

In addition, higher carry can provide a cushion that protects against rising interest rates, because it may compensate for the unrealized losses that result from rising interest rates more quickly than lower yielding bonds, all else being equal. For example, for a 1% rise in interest rates, investors in high yield emerging markets corporate bonds would recoup the resulting decline in market value in about 0.5 years, versus nearly two years in U.S. investment grade corporate bonds (as measured by the Bloomberg Barclays U.S. Corporate Bond Index), due to both higher carry and lower duration.

Higher Carry = Shorter Breakeven Holding Periods

Higher Carry = Shorter Breakeven Holding Periods

Source: J.P. Morgan, BofA Merrill Lynch and Bloomberg. EM Local represented by the J.P. Morgan GBI-EM Global Diversified Index; HY EM Corporates represented by the BofA Merrill Lynch Diversified High Yield US Emerging Markets Corporate Plus Index; U.S. HY represented by the BofA Merrill Lynch US High Yield Index; IG Corp represented by Bloomberg Barclays U.S. Corporate Bond Index.

An allocation into higher yielding fixed income sectors could therefore provide the ballast within a portfolio that core fixed income sectors may not provide in a rising rate environment. Although investors assume additional credit risk by moving into high yield bonds versus investment grade, this may prove to be a profitable trade if expectations of higher growth comes to fruition.

Continued volatility - focus on quality: Higher quality assets may be more resilient in periods of market volatility. One area within emerging markets that may allow investors to be more defensive is U.S. dollar denominated investment grade sovereign emerging markets bonds. This sector may allow investors to avoid the volatility that can be associated with emerging markets local currencies, while maintaining high credit quality which may benefit investors if spreads begin to widen. Further, these bonds provide a significant yield advantage over other investment grade fixed income sectors such as U.S. corporate bonds.

Yield Pickup versus Investment Grade Fixed Income
as of 12/31/2016

Yield Pickup vs. Investment Grade Fixed Income

Source: J.P. Morgan, BofA Merrill Lynch and Bloomberg. EM IG USD Sovereigns represented by the investment grade subset of the J.P. Morgan EMBI Global Diversified Index; U.S. IG Corporates represented by Bloomberg Barclays U.S. Corporate Bond Index; U.S. Agg represented by the Bloomberg Barclays U.S. Aggregate Bond Index.

Although these bonds may exhibit sensitivity to changes in interest rates, they could also benefit if rates retreat from their recent highs. This could occur if it appears that Trump may not be able to deliver on the growth-oriented agenda he has promised, resulting in lower inflation expectations.

Market reversal - local currencies poised to benefit: Emerging markets local currencies have borne the brunt of the emerging markets selloff following the election. In addition to the significant appreciation in the U.S. dollar over the past few weeks, concerns about the impact of Trump's campaign proposal on specific countries, such as Mexico, have weighed on currency valuations. By historical measures, many emerging markets currencies were already cheap prior to the election, and since then have sunk to levels not seen since the financial crisis in early 2009. Given these levels, any sign that the Trump agenda (as it relates to emerging markets) has stalled, been sidetracked, or will be ineffective, may boost local currencies.

Other items on Trump's agenda could benefit emerging markets local currencies. Much of the market impact from Trump's win has been attributed to expectations of an inflationary infrastructure spending program. Many emerging markets currencies are closely linked to commodity prices, which could benefit under this scenario. In addition, the recent OPEC (Organization of Petroleum Exporting Countries) production deal may keep oil prices higher, helping to support the currencies of oil exporters such as Russia, Colombia, and even Mexico.

EM FX versus Commodity Prices
January 2011 – December 2016

EM FX vs. Commodity Prices

Source: Bloomberg and J.P. Morgan. Commodity Prices represented by Bloomberg Commodity Index. EM Currencies represented by the currency return index of the J.P. Morgan GBI-EM Global Diversified Index. Past performance is no guarantee of future results.

Low visibility - hold the entire market: The effects of Trump's win, and more broadly, changes in economic and geopolitical outlooks, tend to impact the various sectors within emerging markets bonds differently. For example, local currency bonds have recently exhibited larger drawdowns versus hard currency bonds, while corporate bonds have outperformed as tighter spreads offset the impact of higher interest rates. Deciding where to allocate within emerging markets bonds is an active decision that can significantly affect an investor's risk/return profile, and given the lack of clarity that currently exists, this can be extremely challenging. As an alternative, investors may prefer to have broad beta exposure to the entire emerging markets bonds opportunity set, and potentially benefit from the inherent diversification within the asset class.

In the final post of this series, we will examine the performance characteristics and the potential benefits of investing in emerging markets bonds from a portfolio construction perspective.

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Deleveraging Tightens Metals Supply and Supports Prices: Part 2 https://www.vaneck.com/blogs/natural-resources/deleveraging-tightens-metals-supply-and-supports-prices-part-2/ In Part 2, we look beyond capex cuts, and explore other steps metals miners are taking to help reduce debt, such as cutting/restructuring dividends and selling/closing unprofitable assets.

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VanEck Blog 12/21/2016 10:38:58 AM

Part two of a two-part series by Senior Analyst Charl Malan.

Overview: VanEck's natural resources investment strategies span the breadth of raw materials commodities sectors, and base/industrial metals play an important role. As of November 30, 2016, base/industrial metals-related holdings accounted for approximately $1.5 billion of the firm's assets under management.

Miners Take Multiple Steps to Deleverage

In Part 1 we focused on how the metals mining industry has tackled deleveraging by reducing capital expenditures ("capex"). In Part 2 we ask the question, "Are metals miners cutting costs too deeply?" We also explore the additional measures miners are taking to reduce debt, including cutting or restructuring dividends and selling or closing unprofitable assets.

Are Cost Reductions Cutting Too Deeply?

Most metals producers are well into the process of reducing overall costs, and the industry has experienced, on average, an approximate 26% decline in costs over the three-year period from 2013 through the end of 2015. At the World Copper Conference that we attended in Santiago, Chile, this past April, the case was made that costs could fall by another 15% or more, driven by efficiency improvements and large-scale layoffs (such as those announced in early October by the Chilean copper mining group Antofagasta, which is trimming 7% of its workforce, and Polish mining company KGHM Polska Miedź S.A., which is letting go of 12%).

Cutting too deeply into the cost structure is already having repercussions on future supply. The "supply chain" has experienced a structural shift and a massive destocking has occurred in terms of equipment, consumables, and labor. A dearth of key skills during the 2000s plagued the industry (Chart A), and as a net result, many mining projects experienced schedule over-runs (Chart B). Both factors will likely have an impact on the supply response in the short- to medium-term.

Chart A: Metals Mining Labor Supply is Not Meeting Demand
Labor Supply and Demand Growth (%) CAGR* 2005 - 2011

Chart A: Metals Mining Labor Supply is Not Meeting Demand

Source: Xstrata (from McKinsey).
*CAGR is compound average growth rate.

Chart B: Many Mining Projects are Experiencing Schedule Over-Runs
Estimated %

Chart B: Many Mining Projects are Experiencing Schedule Over-Runs

Source: Xstrata (from McKinsey).

Cost cutting may also have an impact on future supply by impacting other areas including the availability of consumables such as explosives, equipment such as trucks, shovels, and parts. This could especially be the case with equipment where lead times could expand rapidly as demand for new equipment increases.

Restructuring Dividends to Help Reduce Cash Flow

Among the industry's "Big Six" diversified mining companies (BHP Billiton, Rio Tinto, Glencore, Anglo American, Vale, and Freeport-McMoRan) cutting or restructuring dividends has been a core method of reducing cash outflow. In February this year, BHP Billiton slashed its dividend by 75%, its first reduction since 1988, as it ditched its progressive dividend policy (a steady or higher dividend at each half year) for a payout ratio based on earnings (payout of 50% of attributable profit). By cutting dividends in 2016, BHP Billiton is expected to reduce outflows by $6 billion, Vale by $5 billion, Rio Tinto by $4 billion, Glencore by $2 billion, and Anglo American and Freeport-McMoRan by $1 billion each.

The effect on long-term supply from cutting dividends relates directly to future capital allocation. It appears that shareholders are demanding that excess cash be returned via dividends and/or used to reduce debt in order for businesses to be managed more efficiently in a potential down cycle. We believe this demand for capital will mean that any growth spending will be carefully scrutinized and expected hurdle rates will be significantly higher than the historical average, and this means that less money will be allocated to growth. This is likely to have a medium- to long-term impact on supply response.

Closing and Selling Assets to Help Reduce Debt

As Chart C illustrates, asset sales have been a very popular strategy among miners in order to help reduce debt, not only because it represents a potentially significant cash inflow, but also because these assets are typically a drag on EBITDA and, therefore, on net debt/EBITDA (EBITDA represents a company's earnings before interest, tax, depreciation and amortization, and is a measure of a company's operating performance). This strategy has been extremely successful, and we continue to be surprised by the full price buyers are paying for second-tier assets. For example, Freeport-McMoRan has inked a deal to sell a 13% stake in Morenci to Sumitomo for a cash consideration of $1 billion, which equates to 13x EV/EBITDA (the industry trades around 7x EV/EBITDA).

Chart C: Overview of Potential Assets for Sale
Estimated %

Chart C: Overview of Potential Assets for Sale

*"N/A" includes assets with variable interests or where interest details are unavailable
**"Other" includes agriculture, energy, industrial or refractory metal assets

We believe that selling assets will have a medium-term impact on metals supply and it will be more severe than the market anticipates. The reason is that, once an asset is sold, its entire operational infrastructure is reconfigured to process only "profitable" tonnes, which in normal course of business means that capacity is generally reduced by approximately 10% to 20%.

Although the industry's long list of potential asset closures has been well publicized, it has only been when the industry started to close assets that the reality of what was about to happen has struck home.

Zinc Provides A Case Study in Supply

A classic case study remains zinc. Although we have written about it earlier this year (Zinc's Year to Remember, A Supply Side Story), it is important to recall that it was only in June 2016, when global supply had contracted by about 12.5%, that people started to take note. This reduction was a truly global phenomenon, with Europe cutting production by as much as 10.1% and India by 39.5%. At the same time, China the world's largest zinc producers reduced supply by about 6.9%.

Closing loss-making assets has a short-, medium-, and long-term impact on metals supply. Although these assets could again become operational, it normally requires much higher and, more importantly, sustainable commodity prices for that to happen. The reason is that the cost of reopening mining infrastructure (especially underground) is lengthy and expensive, not to mention there are typically issues associated with ramp-up and product quality.

"The Cure for Low Prices is Low Prices" Speaks the Truth

As we concluded in Part 1, the old saying of "the cure for low prices is low prices" really speaks the truth. We do, however, think prices will be more sustainable over the medium term, as the existing supply base has been significantly reduced and there are virtually no signs that it will change, even now that we are experiencing some higher commodity prices. We believe this creates an ideal environment for commodity equities: sustainable commodity prices, low costs structures, high cash flow, and the desire to return capital to shareholders.

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Time to be Opportunistic in Emerging Markets Bonds https://www.vaneck.com/blogs/emerging-markets-bonds/time-to-be-opportunistic-in-emerging-markets-bonds/ VanEck Blog 12/15/2016 6:16:30 PM

No matter one’s point of view, November was a watershed month for global financial markets. The immediate reaction for holders of emerging markets bonds was to sell first and ask questions later. This sell-then-ask process has been the fate of many risk markets over the past decade. For emerging markets bonds, it did not take long for prices to move significantly lower and then usher in the “ask questions” phase. The market reaction was swift, with higher rates and a stronger U.S. dollar. This continued after the Federal Reserve delivered an expected rate increase following their meeting on December 13-14, but with an unexpectedly hawkish forecast for 2017.

USD Strength Impacts Local Bonds

Hard currency sovereigns were negatively impacted by a 55 basis points (bps) increase in 10-year U.S. Treasury rates in November, ending the month with a return of -4.1%. Investment grade sovereigns were more impacted than the broader universe due to their longer duration. However, higher quality bonds now also provide an approximately 90 bps pickup versus U.S. investment grade corporate bonds, a significant increase in relative value versus October. High yield emerging markets corporate bonds posted a relatively modest negative return of -1.6% due to a shorter duration than other sectors, and remain a bright spot with year-to-date returns of 14.4%. These gains have been driven equally by the significant carry they provide, as well spreads which have tightened year to date (and which remained steady in November).

Extreme volatility in some emerging markets currencies impacted the local currency sovereign space, which declined 7%, with 5% attributable to currency depreciation and the remaining 2% from higher local rates. Within local currency bonds, Turkey and Mexico stood out as laggards in U.S. dollar terms due to the large selloff in their currencies. Although not immune to the broad weakness in emerging markets currencies, Russian and Colombian bonds were the best performers (although still negative for the month), with the former expected to be more insulated from Trump’s foreign policies, and the latter benefitting from a renewed peace deal with FARC (The Revolutionary Armed Forces of Colombia) and posting small positive returns in local terms. In addition, both Russia and Colombia rely heavily on commodity exports and their local bonds received some support from the increase in oil prices that resulted from OPEC’s (Organization of Petroleum Exporting Countries) announced production limits.

What’s Next for Emerging Markets?

The prevailing sentiment post-U.S. election is somewhat pessimistic for emerging markets. The consensus is that fiscal stimulus will more than make up for monetary tightening, spurring a reflationary trend that is likely to occur inside a newly formed bubble of protectionism that will leave many emerging markets without a key engine for growth. Another by-product is that populist/nationalist movements will succeed (as the rejection of the Italian referendum validated in early December) throughout the developed world over the next several years, significantly altering the geopolitical and economic landscape.

Our view is more nuanced. We believe the prospects for emerging markets in 2017 centers around a few critical questions. One: How will higher U.S. rates, should that trend continue, impact flows? Two: Will the U.S. dollar continue its upward trend on the back of higher rates and a wave of protectionism? And three: Can emerging markets growth continue to recover? Consensus is for growth to accelerate slightly in 2017, but sentiment also appears to be that a fiscally led pick-up in developed markets economies will happen largely in a vacuum as trade relationships are under threat. Given years of progress in the opening of global markets, this last assumption is a difficult one to digest, but it also means that the continued rise of the U.S. dollar is not a foregone conclusion.

Be Savvy and Opportunistic Amid the Volatility

Given the uncertainty in the market, economic and political developments (or even an off-the-cuff early morning tweet by President-elect Trump) are likely to keep volatility elevated in the near term.

We believe investors should keep two things in mind. First, the positive note is that from a static perspective, emerging markets fundamentals (growth, debt stock, real rates, and policy flexibility) remain at a favorable starting point relative to developed markets as we enter 2017. While current accounts are more of a mixed story, in many cases they have improved. On the other hand, the less positive note is that the range of potential outcomes in 2017 – for U.S. rates, growth and inflation, EU and Japanese monetary policy – is extraordinarily wide, with opposite or divergent outcomes possible depending on the course of events. While emerging markets assets can do better in 2017 than recent press and analyst coverage may suggest, we believe that being savvy and opportunistic (and contrarian) about adding exposure could help enhance the risk/reward.

November 2016 1-Month Total Returns by Country

November 2016 1-Month Total Returns by Country Chart

Source: FactSet as of 11/30/2016. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

 

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Markets Still Don’t Believe the Fed https://www.vaneck.com/blogs/market-insights/markets-still-dont-believe-the-fed/ On December 14, the Fed confirmed its optimism for the U.S. economy by signaling a faster pace of tightening in 2017, and delivering a widely-expected 25 basis point rate hike.

 

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VanEck Blog 12/15/2016 5:23:01 PM .lm20 {margin-left:30px;}

Contributors: Eric Fine, Portfolio Manager for Emerging Markets Fixed Income; Natalia Gurushina, Economist for Emerging Markets Fixed Income; Charles Cameron, Deputy Portfolio Manager for Natural Resources Equity; and Fran Rodilosso, CFA, Head of Fixed Income ETF Portfolio Management.  

Fed Raises Interest Rates for the First Time in 2016

The Federal Reserve (the “Fed”) confirmed its optimism for the U.S. economy yesterday by signaling a faster pace of tightening in 2017, as well as by delivering a widely-expected 25 basis point rate hike. This was the Fed’s first hike since December 2015 and only its second since the financial crisis of 2008. It was the projection of a slightly accelerated pace of tightening and some comments by Fed Chair Yellen in the press conference that caught markets off guard, and both equity and fixed income prices moved lower yesterday.

We expected higher yields and a stronger U.S. dollar prior to this development, and the Fed’s actions strengthen the case. This is likely to be negative for emerging markets hard- and local-currency bonds. Higher relative interest rates and growth rates in the U.S. are a powerful attractor to the U.S. dollar. Moreover, emerging markets funds could experience outflows for emerging markets-specific reasons, in addition to the likelihood of outflows from bond funds in general. Even if credit quality remains stable, the simple math of higher U.S. Treasury yields means losses on bond prices. It is worth noting that U.S. yields have been declining for 35 years and that until very recently there was broad and deep conviction in the market that interest rates would be low “forever.” In other words, the context of the Fed’s moves could point to an important turning point.

Key Takeaways on Fed Hike

Here are the key takeaways from the Fed’s hike, which resulted in a 0.25% increase in short-term interest rates to a range of 0.50% to 0.75%:

  • Inflation: Higher inflation and inflation expectations do matter for the Fed. As a side note, U.S. headline CPI (consumer price index) edged up to 1.7% year-on-year in November, while the Fed’s preferred measure of inflation expectations is now near 2%. In the short term, higher energy prices may boost inflation going into 1Q of 2017 (the base effect). In the longer run, delivering fiscal stimulus in the later stage of this cycle with tighter labor markets can prove very inflationary. Both may embolden the Fed’s hawkish faction.

  • Yield Curve: The U.S. Treasury curve bear-flattened (short-term rates moved more than long-term rates, though the whole yield curve shifted upward) after yesterday’s Fed decision. If this trend continues, the market is likely indicating that the U.S. economy cannot handle Fed rate hikes, and that the pace of hikes should be slowed.

  • Upward Risks to Growth: U.S. election results have created the possibility of a fiscal expansion that could boost growth expectations. Tax cuts and structural reform could boost confidence. The Fed does not expect U.S. GDP growth to rise above 2.1% in its forecasts, so any growth upside may push the Fed in a hawkish direction.

  • Markets Still Dovish: Markets are still assuming the Fed will be less aggressive than the Fed itself has indicated. Although markets have nearly caught up to the Fed’s 2017 plans, they appear to be pricing in significantly less tightening than what the Fed is signaling over the course of 2018 and 2019 (see chart below). Should the market catch up to the Fed, let alone begin to fear that the Fed has fallen behind the curve, there is potential risk of further duration selloffs and U.S. dollar appreciation (a higher likelihood if the new Trump administration delivers its promised fiscal stimulus).

 

The timing of the next Fed rate hike will depend on many factors. The Fed gave little indication that Trump’s election had altered its economic outlook, and Yellen has expressed a wait-and-see approach to the “cloud of uncertainty” surrounding Trump’s plans. But a projection of three hikes in 2017 would certainly put a 1Q 2017 hike on the table.


Source: Bloomberg LP. As of 12/14/2016.  
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Moats React Bigly in November https://www.vaneck.com/blogs/moat-investing/moats-react-bigly-in-november/ Many domestic and international wide moat companies flourished following the U.S. presidential election resulting in the outperformance of Morningstar's U.S Moat and International Moat Indices, versus their respective broad market indices.

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VanEck Blog 12/14/2016 12:00:00 AM

For the Month Ending November 30, 2016

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or “the U.S. Moat Index”) outpaced the S&P 500® Index (5.51% vs. 3.70%) in November as several constituents flourished in the days following the results of the U.S. presidential election. The election had a similar effect on some international moats, and as a whole they outperformed the broad international markets. Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or “the International Moat Index”) outpaced the MSCI All Country World Index ex USA (1.78% vs. -2.31%).

Year-to-date through November 30, both Indices bested their benchmarks. The U.S. Moat Index has gained 21.76% versus 9.79% for the S&P 500 Index, and the International Moat Index rose 4.42% compared to 1.89% for the MSCI All Country World Index ex USA.

U.S. Domestic Moats: Trump Bumps↑ and Slumps↓

The U.S. elections impacted markets broadly, and generally gave a boost to U.S. equities while creating headwinds for global fixed income markets. The Trump victory benefitted specific U.S. industries and sectors, including financials and infrastructure, and this was reflected by the U.S. Moat Index’s top performers for the month. Wide moat rated banks such as Wells Fargo & Co (WFC US, +15.98%) and State Street Corporation (STT US, +12.23%) were among the strongest performers in the U.S. Moat Index in November. Railroad companies CSX Corp. (CSX US, +17.98%) and Norfolk Southern Corp. (NSC US, +15.21%) were also standouts. Both companies jumped the day after the election and continued to rise in the weeks following; Morningstar equity analysts raised their fair value for NSC US at the end of the month. On the flip side, several companies reacted negatively to the election results, particularly those that may be impacted by healthcare reform and international trade. Healthcare IT firm Cerner Corp (CERN US, -15.02%) and global-trade dependent Visa Inc. (V US, -6.10%) were among the Index’s leading detractors.

International Moats: Game On

Financials, which struggled in the aftermath of Brexit, recovered to support the International Moat Index in November. The primary drivers of Index performance were gaming companies with operations in Macau and Singapore. The Index’s top five performers were all gaming companies, led by MGM China Holdings Ltd (2282 HK, +34.08%) and Genting Singapore PLC (GENS SP, +28.50%). By contrast, poor performance from Australian communications firm Vocus Communications (VOC AU, -29.09%) following management’s disappointing guidance notes was not enough to drag the Index into negative territory.

(%) Month Ending 11/30/16

Domestic Equity Markets

International Equity Markets

(%) As of 11/30/16

Domestic Equity Markets

International Equity Markets

(%) Month Ending 11/30/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
CSX Corporation
CSX US
17.98
Wells Fargo & Company
WFC US
15.98
Norfolk Southern Corporation
NSC US
15.21
Tiffany & Co.
TIF US
12.34
State Street Corporation
STT US 12.23

Bottom 5 Index Performers
Constituent Ticker Total Return
Visa Inc. Class A
V US
-6.10
Allergan plc
AGN US
-7.01
Eli Lilly and Company
LLY US
-8.51
Stericycle, Inc.
SRCL US
-8.89
Cerner Corporation
CERN US
-15.02

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
MGM China Holdings Limited 2282 HK 34.08
Genting Singapore Plc GENS SP 28.50
Galaxy Entertainment Group 27 HK 20.85
Wynn Macau Ltd. 1128 HK 20.81
Sands China Ltd. 1928 HK 13.16

Bottom 5 Index Performers
Constituent Ticker Total Return
CapitaLand Commercial Trust CCT SP -5.60
Seven & I Holdings Co., Ltd. 3382 JP -6.68
Symrise AG SY1 GR -11.59
Tata Motors Limited TTMT IN -15.81
Vocus Communications Limited VOC AU -29.09

View MOTI's current constituents

As of 9/16/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Bristol-Myers Squibb BMY US
Deere & Co DE US
Lowe's Cos Inc LOW US

Index Deletions
Deleted Constituent Ticker
Cerner Corp CERN US
LinkedIn Corp LNKD US
Western Union Co. WU 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
China State Construction International Holdings Ltd. China
Dongfeng Motor Group Co. Ltd. China
Beijing Enterprises Holdings Ltd. China
Iluka Resources Ltd Australia
Blackmores Ltd Australia
Orange France
Cheung Kong Property Holding Ltd Hong Kong
Industrial and Commercial Bank of China Ltd China
Ioof Hldgs Ltd Australia
Galaxy Entertainment Group Ltd. Hong Kong
Mobile TeleSystems PJSC Russian Federation
CSL Ltd Australia
Sun Hung Kai Properties Ltd. Hong Kong
Grifols SA Spain
Telstra Corp Ltd Australia
China Construction Bank Corp China
Singapore Exchange Ltd Singapore
Woolworths Ltd Australia
Alfa Laval AB Sweden
China Telecom Corporation Ltd. China
Bank of China Ltd China
Vocus Communications Ltd Australia
Infosys Ltd India
DuluxGroup Ltd Australia

Index Deletions
Deleted Constituent Country