VanEck Blog https://www.vaneck.com/templates/blog.aspx?pageid=12884907249?blogid=2147483856 Insightful, Weekly Commentary on the Municipal Bond Markets 2017-09-22 en-US Asset TV Masterclass: Responsible Investing https://www.vaneck.com/blogs/muni-nation/asset-tv-responsible-investing/ William Sokol, VanEck Vectors Product Manager, shares his views on green bonds in Asset TV's recent video, Responsible Investing Masterclass. 

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VanEck Blog 9/21/2017 12:00:00 AM

William Sokol, VanEck Vectors Product Manager, participated in Asset TV's recent (September 11) Responsible Investing Masterclass video panel, hosted by Asset TV's Gillian Kemmerer. Sokol joined industry experts Amanda Cimaglia of Hannon Armstrong and Mary Jane McQuillen of ClearBridge Investments. Sokol's comments are excerpted below.

VanEck's Approach to Responsible Investing with GRNB

GILLIAN KEMMERER: Responsible investing has become the subject of headlines around the world as investors increasingly vote with their wallets.  From fixed income to public equities, the opportunity set for doing well by doing good is vast. What does VanEck do in the impact space?

WILLIAM SOKOL: VanEck focuses on providing access to a broad range of investment opportunities that we believe help to strengthen an investor's long-term portfolio. This includes developing forward-looking, intelligently designed responsible investing strategies like VanEck Vectors® Green Bond ETF (GRNB) which we launched earlier this year.

Gillian:  Let's dive into the terminology of this space.  I feel like every time I talk about impact investing there is new terminology or a new set of acronyms.  How are you seeing the terminology in this space evolve? Is there one particular definition that you subscribe to at VanEck?

What VanEck Means by "Responsible Investing"

SOKOL: There can be confusion, especially as terminologies evolve. The fact that there are multiple ways to invest responsibly can add to the confusion. For us, "responsible investing" is based on a thesis that sustainable, efficient, and responsible business practices can help both to reduce risk and create value. There are many approaches. With our green bond strategy, the focus is clearly on the "E" in E(nvironmental) S(ocial) G(overnance).  It looks only at the green bond itself: the issue rather than the issuer. This is a style of responsible investing that follows an inclusive approach. We don't exclude entire sectors from the strategy. We believe any company can and should issue a green bond.

KEMMERER: When you talk about your responsible investment strategy, do you find a bias towards screening out as opposed to "screening in"?

SOKOL: The idea of screening out is likely a common perception among investors who are new to this space or less familiar with it. There is a perception that ESG investing means the wholesale exclusion of entire parts of the market. There is probably a need for additional education on the ways that you can invest responsibly. You don't necessarily have to stray significantly from your benchmark. Green bond investing is certainly one way you can do this. But you can invest similarly across investment strategies and asset classes.

Is There a Performance Trade-Off with Responsible Investing?

KEMMERER: There is a general misconception, and perhaps it's starting to abate, that if you want to make an impact you have to trade-off some performance.  Do you find this perception persists, and how do you tend to combat it?

SOKOL: I do think that perception is starting to abate, and it introduces another aspect of responsible investing and why you may want to consider it for your portfolio. And that is as a risk reducer.  One type of risk that you can address through responsible investing is climate risk.  Climate risk can mean the physical risk of rising temperatures. For example, think about a municipality that might have infrastructure that is prone to rising sea levels or storms, for example. Climate risk can also come from changes in government policy introduced to change behaviors to address climate change.  An example is an energy company that has significant reserves in the ground, and a scenario where the government introduces taxes or regulations that make it more costly for the company to extract those resources. This might impact the performance of an investment in that company.  Climate risk is complex.  But what we are finding is that the market doesn't currently price in that risk.  You can see this with green bonds, because green bonds get issued at yields that are in line with non-green bonds from the same issuer.  That makes sense because two bonds from the same issuer are going to have the same risk and return drivers.

But at the issuer level, with green bonds, you are getting exposure to a group of issuers that are taking a long-term approach to addressing climate risk.  This means that when the day arrives that climate risks begin to get priced into the market, you might expect that issuers exposed to higher levels of climate risk are likely to perform worse than those issuers that are addressing and managing those risks today. I think responsible investing doesn't need to mean you have to sacrifice returns. In fact, it can mean reducing risk in your portfolio and perhaps adding to long-term performance.

Measuring the Impact of Green Bond Investing

KEMMERER: What metric is used to measure impact in your green bond strategy?

SOKOL: A variety of metrics are looked at, and it depends on the individual bond. Green bonds can be issued to finance a variety of different types of projects, so you need to look at what the green bond is financing. Is it a renewable energy project?  Is it a mass transit project? Is it an energy efficient building? I think green bonds are interesting from an impact standpoint because you can get direct visibility into the projects that are being financed. Issuers typically provide ongoing reporting that usually include impact estimates. Issuers will provide metrics such as C02 emissions reduction, energy generated, water saved, etc.

There is a challenge, however, as these estimates come from different sources and different issuers. In addition, because there is no standardized way to measure and report impact, the different parties who produce these estimates may use different assumptions and different baselines. There is also no centralized location investors can go to for this information, and for some bonds, the information may not be publically available. I think the good news is that there is significant work being done around impact measurement, and investors are increasingly demanding it. I would expect to see significant progress in the space over the next few years.

ESG Investing is No Passing Fad, But a Long-Term Investment Approach

KEMMERER: Is impact investing a fad or is it something that you find clients saying: "This is here to stay and it's not just a niche in my portfolio, but part of the core?"

SOKOL: I don't think impact investing is a fad, it is here to stay. I believe the numbers speak for themselves, such as AUM [assets under management] growth in U.S. ESG mutual funds and ETFs.  I believe there is still more room for that area to grow. The bigger picture shows that, in the U.S., approximately $9 trillion is now managed in some way that incorporates ESG factors. This is up 33% over the last three year, and I believe this now accounts for around one out of every four dollars.1 From that perspective, the space is already quite large. I think this is because of the growing recognition that responsible investing makes a lot of sense as an additional evaluation in the investment process. It is a framework to assess investments, to identify potential risks, i.e., whether the business practices are sustainable or unsustainable.

There is also a growing recognition that you don't need to sacrifice performance. But there is the non-financial motivation as well  – whether it's impact or, more generally, a growing desire to direct capital towards investments that help to address some of the challenges we currently face, for example, global warming.  It has been well documented that millennials show a strong interest in responsible investing. This is going to be something that continues to drive assets into the space for years to come. However, to date, much of the growth has come from some of the world's largest, most sophisticated, institutional investors. We are seeing broad interest in responsible investing and broad adoption.

What is a Green Bond?

KEMMERER: Bill, let's give a definition for those not familiar.  What is a green bond?

SOKOL: A green bond is in many ways like any other bond: the issuer will pay a periodic coupon and pay back par at maturity, and in the vast majority of cases, the bond is backed by the full balance sheet of the issuer. What differentiates a green bond from a conventional bond is that the issuer uses the proceeds only to finance environmentally friendly projects. That could mean renewable energy projects (for example, solar and wind projects), energy efficient buildings, and many other types of projects.  The green bond market is only about 10 years old, but has grown significantly in recent years.  There is now $200 billion of outstanding issuance.  This year there are expectations for $120 to $150 billion of total issuance, so the market is growing rapidly.2 With this growth, we have also seen the emergence of new types of issuers coming into the market.

A Closer Look at Green Bond Issuers

KEMMERER: Who is issuing these green bonds?

SOKOL: If you look at the S&P Green Bond Select Index, currently approximately one third of total outstanding issuance is from corporate issuers.  Another third comes from government and government related issuers, and the remaining third is financial issuers, such as commercial banks.  The universe has become pretty diverse, and it has evolved over the years to resemble a global aggregate type bond benchmark in terms of yield, duration, and credit quality.  And in terms of who's issuing these bonds, there have been some interesting stories in the last year or two.

Apple Issues the Largest Corporate Green Bond in the U.S.

SOKOL: Apple is probably one of the more notable issuers in the U.S., and in 2016 it issued the largest corporate green bond in the U.S. to date.  It was a $1.5 billion issue.  The company used proceeds from that bond to fund green buildings, renewable energy projects, and new technologies that will help eliminate the need to mine certain materials from the ground, and to achieve what they call a "closed-loop" manufacturing process.  Apple issued their first bond in 2016 in support of the Paris Agreement, to show that businesses can take a leadership role in addressing climate change.  The company issued a second green bond recently earlier this year, right after the U.S. announcement to withdraw from the Paris Agreement.  Apple was a vocal supporter of remaining in the Paris Agreement.  I think that second green bond issuance was a sign that the green bond market and green finance, in general, won't be thrown off by the new administration's recent decision.

Apple is not the only company we are seeing. Companies like Southern Power, Georgia Power, and Mid American Energy have also issued green bonds in the past few years.  These bonds went to fund renewable energy projects across the country. These are a great illustration that any company can issue a green bond, even energy companies. In fact, we welcome issuance from energy companies, because these companies will likely play an important role in the transition to a low carbon economy.

Incorporating ESG into an Investment Portfolio

KEMMERER: Let's bring it back to the end client, and advisors asking, "Where does this fit into a larger portfolio?" Is it a core or niche portfolio strategy?  And if it is core, how do you encourage investors to think about incorporating ESG?

SOKOL: I think the integration of ESG factors, in itself, is not an investment strategy.  It is a framework that can be applied to many different types of investment strategies within a portfolio.  Within a portfolio, you can certainly have core sustainable investment strategies.  Perhaps those are part of your strategic asset allocation.  You can have satellite positions as well.  If you look at the universe of product offerings right now, there is a wide range of sustainable investment strategies, particularly on the equity side.  On the fixed income side, your choices now are a little more limited.  However, green bonds can certainly play a key role within a core global bond portfolio because what you have is an opportunity set that is multi-sector, primarily investment grade, diversified, and with yield and duration characteristics which are very similar to a global aggregate bond benchmark. Green bonds can fit seamlessly into a core bond portfolio.

KEMMERER: I feel like this has been a great discussion, we've had such a variety of perspectives.  We have talked about the definitions.  We've dispelled some of the misconceptions.  We have had an opportunity to dive into your area of focus and how it fits into a larger portfolio. 

Watch Video Asset TV Masterclass: Responsible Investing - September 2017

William Sokol, VanEck Vectors Product Manager, participated in Asset TV's recent (September 11) Responsible Investing Masterclass video panel, hosted by Asset TV's Gillian Kemmerer. Sokol joined industry experts Amanda Cimaglia of Hannon Armstrong and Mary Jane McQuillen of ClearBridge Investments.

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Crucial Metals for a Lower Carbon World: Part 1 https://www.vaneck.com/blogs/natural-resources/crucial-metals-lower-carbon-world-part-1/ Economies are adopting clean energy technologies, and industrial metals are playing a critical role. Copper, nickel, graphite, and cobalt are especially crucial for renewable energy and electric vehicle technologies.

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VanEck Blog 9/19/2017 12:00:00 AM

Overview: VanEck's natural resources investment strategies span the breadth of commodities sectors, and base/industrial metals play an important role.

This is Part 1 in our series by Senior Analyst Charl Malan that looks at the importance of industrial metals as the world adopts new clean energy technologies that reduce carbon emissions.

Clean Energy Technologies Require Metals: Copper, Nickel, Graphite, Cobalt

We are in the early stages of transitioning to a lower carbon world. Economies are adopting clean energy technologies, and industrial metals are playing a crucial role. Of these, we see copper, nickel, graphite, and cobalt as critically important, especially when focusing on new renewable energy and electric vehicle technologies. As demand for each grows, current supply issues will be further exacerbated. (See Deleveraging Tightens Metals Supply and Supports Prices: Part 1 and Part 2.) Mining companies that are well positioned to meet the demand for these important metals look set to thrive. In Part 1 of our series, we focus on copper.

Copper is Key

Copper, given its impact and market size, will be one of the most important metals in the world's decarbonization process. The size of the world's copper market, at $91B, ranks it second among industrial metals, behind iron ($115B), and just ahead of aluminum ($90B). By comparison, nickel represents a $21B market, graphite $15B, and cobalt $6B.

New low carbon technologies will use resources that are economically scarce, and among these copper stands out. We believe that copper demand will continue to grow and that supply will remain constrained, creating a dynamic that is likely to support prices. Since early 2016, copper prices have been on an upswing, after enduring a major bear market from 2011 to 2015.

How Big is the World's Copper Market?

World's Copper Market Chart

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

How Copper Can Help Tame Carbon Emissions

Energy production accounts for 71% of the world's total greenhouse gases, of which the vast majority are carbon dioxide emissions.1 These emissions result from electricity generation, transportation, and other forms of energy production and use. It is no surprise that many of the new lower carbon technologies now being developed are focused on developing renewable energy sources (solar and wind) and electric vehicle transport. Copper will be key.

Copper is the world's oldest mined ore and has two unique physical properties that make it highly suitable for low carbon technologies, specifically electric vehicle transportation and new renewable energy power generation technologies: very high thermal and electrical conductivity (second only to silver in this regard).

Energy Production Accounts for Most Global Greenhouse Gases
1990-2010

Energy Production Accounts for Most Global Greenhouse Gases Chart

Source: United States Environmental Protection Agency.2 Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Copper: A Prime Beneficiary of New Low Carbon Technologies

Renewable Energy

Copper is essential for efficient power generation using both wind and solar energy, which use the highest amount of copper among renewable energy systems. Renewable energy power generation, conservatively, uses approximately five times as much copper as conventional generation. But some in the industry believe it may be even more. In October 2016, Jean-Sebastien Jacques, CEO of Rio Tinto, was quoted as saying, "Renewable energy resources require four to 12-times as much copper as traditional fossil fuel-based power generation."3

Electric Vehicles

When considering the potential growth in electric vehicles, copper stands to be a prime beneficiary of any surge in production. Each of the various types of electric vehicles (EV) uses considerably more copper than is already to be found in vehicles using internal combustion engines (ICEs), as shown in the table below. Copper is to be found not only in EV rechargeable batteries, but also in the rotors and windings in the electric motors, bus bars, wiring and, of course, the charging infrastructure, not to mention the inevitable and massive electrical grid expansion, that will be required to support EVs. (See The Evolution of Electric Vehicle Batteries, Part 1 and Part 2.)

Copper Use by Vehicle Type

Vehicle Type Copper (Kgs)
Internal Combustion Engine (ICE) ≈17
Hybrid Electric Vehicle (HEV) ≈40
Plug-In Electric Vehicle (PHEV) ≈50
Battery Electric Vehicle (BEV) ≈145

Source: CDA, Bernstein Analysis, VanEck.

Copper is a highly efficient generator and transmitter of energy, and can achieve these qualities in ways that help to minimize environmental impacts. Whether for use in electric vehicles or sustainable power generation the demand for copper in a lower carbon world is set to increase significantly. Increased demand, constrained supplies, along with a significant decline in growth capital among metals miners (investment in new mines), is likely to help support future copper prices in the months ahead.

In Part 2, we address:

  • Potential growth of the copper market, given increased demand.
  • Specific uses for copper that support renewable power generation and electric vehicles.

In Part 3, we discuss:

  • The role of other crucial metals: nickel, graphite, and cobalt.
  • The potential opportunities for metals mining companies and investors.

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Movement Below the Surface https://www.vaneck.com/blogs/allocation/movement-below-the-surface/ The Fund’s allocations have shifted slightly and remain at near neutral weightings to stocks and bonds.

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VanEck Blog 9/15/2017 12:00:00 AM

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.

August Performance

VanEck NDR Managed Allocation Fund (NDRMX) returned 0.42% versus 0.62% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index), and 0.47% for the Morningstar Tactical Allocation Peer Group average.

The Fund slightly lagged the benchmark in August. Its 5.6% overweight exposure to stocks (relative to bonds) detracted from performance as U.S. bonds outperformed global stocks. The regional equity positioning, in aggregate, was a detractor from performance. The top performing regional equity position was the Fund's underweight exposure to the U.K. and the bottom performing position was the underweight exposure to the Emerging Markets. The Fund's U.S. market capitalization and style positioning was a positive contributor to performance due to its overweight exposure to large-cap over small-cap and growth over value.

Fund Positioning September 2017: Moderately Bullish Positioning Remains

VanEck NDR Managed Allocation Fund's (NDRMX) asset class positioning remained largely unchanged in September. The equity allocation is now 65%, the bond allocation is 35%, and the cash allocation is nearly 0%. There were, however, notable shifts in the regional equity exposures for September. The largest shifts were decreased exposure to Japan (10.4% to 3.8%) and the Emerging Markets (3.4% to 0.9%), and increased exposure to Pacific ex Japan (0% to 5.6%) and the U.S. (40.1% to 42.6%). Within the U.S., the Fund now has more exposure to large-cap value (18.2% to 21.2%).

Fund Positioning Pie Charts

Source: VanEck. Data as of September 5, 2017.

August Performance Review

The month of August brought volatility to the markets. It started off with the Dow Jones Industrial Average breaking through the barrier of 22,000. Unfortunately, the gains were short lived. North Korea's advancements in its nuclear weapons program were met with strong words from President Trump. The tension between the U.S. and North Korea peaked in August when North Korea fired a test missile over Japan. Additional events that impacted the market included the protests in Charlottesville, VA and the consequences of Hurricane Harvey.

Global Balanced Positioning Relative to Neutral*

Global stocks returned 0.38% and U.S. bonds returned 0.90%. This slightly detracted from performance as the Fund started the month with a 65.6% exposure to stocks relative to its 60% stock/40% bond blended benchmark.

Global Regional Equity Positioning Relative to Neutral*

In aggregate, the regional equity positioning detracted from performance. While the Fund benefited from its underweight exposure to the U.K., its overweight exposure to the U.S. and underweight exposure to the Emerging Markets detracted from performance. During the period, the U.K. returned -0.76%, the U.S. returned +0.19%, and the Emerging Markets returned 2.27%.

U.S. Cap and Style Positioning Relative to Neutral*

The U.S. market cap and style positioning was a significant contributor to performance. The Fund was significantly overweight large-cap growth and, to a lesser extent, overweight large-cap value. It had no exposure to small-cap stocks. This worked very well as large-cap growth returned 1.83%, large-cap value returned -1.16%, small-cap growth returned -0.12%, and small-cap value returned -2.46%.

Total Returns (%) as of August 31, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
0.42 11.61
Class A: Maximum 5.75% load -5.35 6.68
60% MSCI ACWI/
40% BbgBarc US Agg.1
0.62 11.14
Morningstar Tactical Allocation
Category (average)2
0.47 9.02
Total Returns (%) as of June 30, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
0.18 11.68
Class A: Maximum 5.75% load -5.57 6.02
60% MSCI ACWI/
40% BbgBarc US Agg.1
0.26 10.49
Morningstar Tactical Allocation
Category (average)2
0.11 8.12

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: A Look at this Month's Regional Equity Shifts

While the Fund has maintained its near-neutral asset class positioning since June, there has been significant movement within the regional equity allocations. This month we will focus on the indicators that drove the regional equity shifts at the start of September. The largest regional shifts this month compared to last were greater exposure to Pacific ex Japan (+5.6%) and less exposure to Japan (-6.6%).

The allocation to Pacific ex Japan increased because of the attractive valuations of Pacific ex Japan relative to the other equity regions and a strengthening technical indicator composite reading. Relative valuations for Pacific ex Japan are measured using relative earnings yields. This chart shows the spread of the earnings yield of Pacific ex Japan to the other equity regions of the MSCI ACWI. The indicator turned bullish in August when the spread increased significantly above its mean (valuations became very cheap) and then reversed (signaling a buying opportunity).

Earnings Yield of Pacific ex Japan vs. ACWI

Earnings Yield of Pacific ex Japan vs. ACWI Chart

Source: Ned Davis Research. Data as of August 31, 2017. Past performance is no guarantee of future results.
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/.

The technical indicator composite reading had been bearish on Pacific ex. Japan since June, but recently started to strengthen and is now in the neutral range. There are six technical indicators in the composite, of which three are bearish, one is neutral, and two recently turned bullish.

Pacific ex Japan Technical Indicator Composite

Pacific ex Japan Technical Indicator Composite Chart

Source: Ned Davis Research. Data as of August 31, 2017. Past performance is no guarantee of future results.
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/.

Conversely, we reduced the allocation to Japan based on declining technical readings. The Japan technical composite reading changed from very bullish to neutral. The indicators within the composite that turned bearish were breadth, momentum, and mean reversion.

Japan Technical Indicator Composite

Japan Technical Indicator Composite Chart

Source: Ned Davis Research. Data as of August 31, 2017. Past performance is no guarantee of future results.
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/.

Additional Resources

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Switching Costs Build Moats and Retain Customers https://www.vaneck.com/blogs/moat-investing/switching-costs-build-moats/ “Switching costs” can build powerful moats that make it difficult and expensive for loyal customers to change brands.

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VanEck Blog 9/13/2017 12:00:00 AM

"How Moats Translate into Sustainable Competitive Advantages" is a five-part moat investing education series that explores the primary sources of economic moats. The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. According to Morningstar Equity Research, there are five key attributes that can give companies economic moats, and which are viewed as sources of sustainable competitive advantages: 1) Network Effect; 2) Intangible Assets; 3) Cost Advantage; 4) Switching Costs; and 5) Efficient Scale. Here we explore the concept of the "Switching Costs."

Customers Get Locked-In by Switching Costs

Many successful companies build customer loyalty by offering high quality products and/or services. Some also have the unique advantage of integrating their products or services into a customer's daily activities and operations, therefore making it tough and costly to switch providers. Powerful moats can be built on "switching costs" which are often embedded in strong business models. Switching costs lock customers into a company's unique ecosystem, and make it expensive to move. Not just monetary in nature, switching costs can also be measured by the effort, time, and psychological toll it takes to switch to a competitor.

Switching costs have the potential to put a company in a position to increase prices and deliver hefty profits over time. They are a key competitive advantage and are evident in a range of industries, from camera equipment to computer software/hardware to telecoms, interalia: Nikon or Canon? Apple or PC? AT&T or Verizon? Morningstar Research explains them as:

Switching Costs. When it would be too expensive or troublesome to stop using a company's products, the company often has pricing power. Architects, engineers, and designers spend entire careers mastering Autodesk's ADSK software packages, creating very high switching costs.

An Early Example: Gillette Razor Blades – Designed to Create Brand Attachment

King Camp Gillette, the inventor of the first mass produced safety razor, was one of the first entrepreneurs to optimize the switching cost approach to lock in customers. In 1902, Gillette developed and began selling inexpensive razors with disposable blades that he had patented. This ensured Gillette a constant high demand for blades, as customers who considered other blades quickly realized that they would incur the cost of a new razor as well.

Economic Moat
Five Sources of Sustainable Competitive Advantage

Five Sources of Sustainable Competitive Advantage

Source: The Morningstar® Economic Moat Rating System.

Switching Costs in Action: Four Case Studies of Moat Companies

To demonstrate the power of switching costs in creating economic moats, we highlight four moat companies: U.S.-based Microsoft and TransDigm Group, and international moats Canadian Imperial Bank of Commerce (Canada) and KION Group (Germany).

Microsoft Corp.'s (MSFT US) Office software is used by more than one billion people around the world. Morningstar has assigned Microsoft a "wide economic moat" rating given its strong network effect and switching costs: "Microsoft's office tools are robust, as the suite is widely used and easily understood by enterprise employees around the world, leading to increased compatibility and efficiency when collaborating". The Windows Operating System has created a virtual monopoly for Microsoft, while the Microsoft Office suite offers one of the most complete feature sets on the market. Microsoft has also become one of the world's leading cloud computing firms.

TransDigm Group Inc. (TDG US) is a leading designer and manufacturer of engineered aircraft components for commercial and military aircraft. TransDigm's "wide economic moat" rating is based on both switching costs and intangible assets. The company's intangible assets are derived from the intellectual property underlying its products, and switching costs are associated with TransDigm parts, their inclusion in plane design, and the need for FAA certification of these parts. Morningstar writes, "…the low overall dollar value of the company's parts, versus the high cost of failure for aircraft, reinforces these switching costs".

Canadian Imperial Bank of Commerce (CM CN) is the fifth largest bank in Canada and boasts 11 million clients. CIBC's business spans retail and business banking, wealth management, and capital markets, and is more domestically Canada-focused than some of its global peers. Morningstar gives CIBC a "narrow economic moat" rating because the bank is not the leader for Canadian banking operations, which limits some of its cost advantages. Morningstar believes that bank moats are typically derived from cash advantages and switching costs: "We think switching costs in the Canadian system are driven by a tightly regulated oligopolistic market structure that limits excess competition, stabilizing product pricing, and giving customers less incentive to switch banks."

KION Group AG (KGX GR) is a German multinational manufacturer of materials handling equipment, specializing in forklift trucks, warehouse equipment, and industrial trucks. KION has a "narrow economic moat" rating from Morningstar: "We believe that switching costs underpin KION Group's narrow economic moat, as a high level of reliance on customization, financing, and service agreements supports customer stickiness." KION is Europe's leading manufacturer of forklifts (and number two globally), which are critical in supporting the growing global e-commerce supply chain. KION's recent acquisition of Dematic, a leader in warehouse automation, increases its moaty profile, given that Dematic is ranked first in market share in the U.S. and number three in Europe and globally.

VanEck Vectors® Morningstar Wide Moat ETF (MOAT®) and VanEck Vectors® Morningstar International Moat ETF (MOTI®) provide access to global moat-rated companies, by seeking to replicate the Morningstar® Wide Moat Focus IndexSM and Morningstar® Global ex-US Moat Focus IndexSM, respectively. Each Index tracks the overall performance of attractively priced companies with sustainable competitive advantages in their respective markets according to Morningstar's equity research team.

MOAT holdings and learn more about moat investing

MOTI holdings and learn more about moat investing

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Cybersecurity and Municipal Bonds: Part 3 https://www.vaneck.com/blogs/muni-nation/cybersecurity-municipal-bonds-part-3/ Part 3 in our series looks at possible drivers to action and incentives to ensure that municipalities address cybersecurity issues.

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

Possible Drivers to Action

This is part three of a three part series by Jim Colby, Municipal Bond ETF Portfolio Manager at VanEck, that explores the intersection between cybersecurity and the municipal bond market. Part 1 looks at what is at stake; Part 2 describes ways in which these issues can be addressed; and Part 3 discusses possible drivers to action.

The Risk of Cyberattack

We are all potentially at risk of cyberattack – directly or indirectly. When it comes to municipalities, this may not always be obvious to the average state or city taxpayer. However, it does not even seem to be that obvious to, or maybe even much appreciated by, many municipalities and/or states.

Even with resources like the NIST Framework and US-CERT (see Part 1 and Part 2) available to them, governments and administrations appear to be moving slowly to protect themselves from cyberattacks – whether targeted at the sensitive information they hold or the services for which they are responsible. If they are actually doing anything, it is not readily evident. You would have thought that, at the very least, they would be telling taxpayers that they are "on it".

Some investors may gain a modicum of comfort from the news that, despite the manifest dysfunctionality of its government in Springfield, the state of Illinois is now adopting mandatory cybersecurity awareness training for all state employees.1 It appears that Illinois is only the 15th state to require such training: What about the other 35?

What Is There To Be Done About It?

Addressing cybersecurity successfully will be predicated on a significant psychological shift in thinking. A shift to thinking first and foremost about prevention, not cure. As cybersecurity expert Hans Holmer2 described it to me the other day "…by externalizing the responsibility associated with cybersecurity, those who are vulnerable willfully ignore the fact that their security essentially boils down to just what they are happy to let the intruders/thieves/hackers… do".

There are many different ways nefarious intruders can be slowed down, the impact minimized, and the cost reduced. But it all has to be done with front-end protection. Think of it as akin to donning a crash helmet before riding a motorcycle.

All a Matter of Incentive

In my view, the real key to success is incentivizing people to establish cybersecurity and to maintain it effectively. The difficulty lies in determining just what that incentive should be. Protection of property and essential services is a universal need, but urgency is still lacking.

Possible Drivers to Action

One possible driver to action could simply be alerting the public through their local media outlets just what havoc can be, and has been, wrought by cyberattacks. For example, at the National Health Service in the U.K. and the power company Prykarpattyaoblenergo in Ukraine. While the latter appears to have been a targeted attack, the former was simply about money. While both were malicious and extremely damaging, they could also be viewed simply as warning shots and indicative of what further might happen.

Another driver could lie with municipalities' furthering their own commitments to high-quality and reliable public services. Terry Smith, CEO and founder of Smith's Cyber Security Gradings, believes that with the tradition of first-class service to uphold, public sector (both state and local) cybersecurity professionals are willing to meet the challenge, but the critical physical infrastructure is weak.

I believe two other potentially effective approaches (if they were adopted) lie with the muni bond market itself. First, lenders should insist that bond issuers meet certain minimum standards of cybersecurity. These could be based on guidelines and standards set out by NIST and/or US-CERT. And their adherence to these standards will be monitored on a continuing basis.

A commitment to and the subsequent maintenance of, these standards would be incorporated in municipal bond offering documents; that is, a clause covering cybersecurity would become standard. Its absence would likely result in a yield penalty to the issuer similar to what occurs with bond insurance.

In the second instance, a commitment to and the recognition of standards by, credit rating agencies would have a direct bearing on an issuer's ability to obtain a stronger rating for the bond: the tradability of the bond would likely improve as a result. Cybersecurity gradings do already exist in the private sector, but not yet in the muni space.

Conclusion

The services provided by municipal borrowers have always been, and remain, vital to our everyday life. The need to protect these services from possible disruption has become ever more important. Cybersecurity can help provide this protection. Cure, as opposed to prevention, is less and less an acceptable option. Luckily, initiatives such as those from NIST and US-CERT already exist. These have been designed to help all levels of government address the challenges of cybersecurity. Incentive remains the key issue.

In sum, initiatives from analysts, bankers, and legal teams, in concert with issuers, to establish a standard clause in bond offering documents committing the borrower to establish and maintain certain cybersecurity standards are of paramount importance. Further, tying an issuer's credit rating to a commitment to, and subsequent maintenance of, certain cybersecurity standards needs the attention of credit rating agencies to provide the market incentive (lower cost) the issuers seek.

NEWS FLASH

Last week, security firm Symantec reported3 that dozens of energy companies, including some in the U.S., had been subject to hacker attacks in spring and summer this year. The firm's analysis found that "hackers obtained what they [power firms] call operational access … giving them the ability to stop the flow of electricity into U.S. homes and businesses." According to an article on the attacks in WIRED,4 Symantec noted that hackers had never before "been shown to have that level of control of American power company systems."

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Gold Hits Stride and Tops $1,300 Hurdle https://www.vaneck.com/blogs/gold-and-precious-metals/hits-stride-tops-1300-hurdle/ Gold made its third attempt of the year to break through the $1,300 per ounce resistance level, and success came late in the month. 

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VanEck Blog 9/11/2017 12:00:00 AM

Third Time's the Charm for Gold in 2017

During August, the gold price made its third attempt of the year to break through the $1,300 per ounce price level. Success came late in the month when the convergence of several catalysts moved gold to its 2017 high of $1,326 per ounce on August 29. The stage was set as gold rose earlier in August when comments from Federal Reserve officials and minutes from the July Federal Open Market Committee (FOMC) meeting indicated a reluctance to raise rates later this year. Then, in a speech on August 26 at the annual Kansas City Fed event in Jackson Hole, Wyoming, Fed Chair Yellen unexpectedly made no mention of rates or guidance. This led the market to believe the Fed would not meet earlier guidance of three rate increases in 2017 (the Fed has raised rates twice this far this year, 25 basis points on March 16 and again on June 15). On August 28, North Korea launched a missile over Japanese airspace in its most provocative move to date. Also late in the month, it became apparent that Hurricane Harvey will likely be one of the most costly natural disasters ever and create a drag on GDP growth over the coming quarters. All of this caused bond rates to drop to their yearly lows and threw the U.S. dollar into a sharp decline. The U.S. Dollar Index (DXY)1 fell to its two and a half year low at the same time gold vaulted to new highs. Gold ended the month with a $51.96 gain (4.1%) at $1,321.40 per ounce.

Best Quarterly Reporting For Producers Since End of Bear Market

Gold producers concluded their second quarter reporting in August. It was possibly the best reporting season of the upcycle that began in 2016. Disappointments were isolated to a few companies with geopolitical issues in Greece, Guatemala, and Tanzania. The vast majority of companies met or beat expectations for production, costs, and earnings. Standouts included companies Agnico Eagle and Newmont which both upped their guidance for 2017 production while lowering cost guidance. The positive results, however, have not been reflected in the companies' share prices. For August, the NYSE Arca Gold Miners Index (GDMNTR)2 gained 7.9%, while the MVIS® Global Junior Gold Miners Index (MVGDXJTR)3 advanced 7.1%. This year the GDMNTR is up 17.7% and the MVGDXJTR has gained 11.1%, while gold bullion has risen 14.7%. Normally gold stocks substantially outperform gold in a positive market. We believe that heavy gold equity ETF redemptions and a lack of broader investor interest in the gold sector have weighed on stocks so far this year. Perhaps this is about to change, as during August the gold equity ETFs have seen their first significant net inflows since February. Valuations remain below long-term averages, which makes gold stocks fundamentally attractive.

Fundamental Factors Strengthen Gold's Base

Since the gold bear market ended in December 2015, the gold price has been forming a base. Gold's recent advance through $1,300 per ounce helps solidify this, which we believe is a prelude to a new bull market that may take shape in the coming months or years. There are several fundamental factors enabling gold to establish a strong base: 1) a historic bear market has already mitigated much of the selling pressure; 2) the Fed's chronic inability to achieve guidance on economic growth or policy plans; 3) global geopolitical unrest; and 4) U.S. dollar weakness.

Testing Long-Term Resistance Levels Next Step for Gold

With this fundamental backdrop in mind, we look to technical chart patterns to discern significant turning points in the gold price. The following chart shows the base forming in a relatively narrow trading range since 2013. An upward trending support line has formed, currently at the $1,230 per ounce level. We expect the fundamentals to hold gold above the support line. Developments that would probably cause gold to fall through support might be: 1) global peace; 2) robust economic growth without inflation; 3) U.S. dollar bull market; or 4) rising real interest rates. We believe all of these are low probability outcomes in the foreseeable future.

Gold Crossed $1,300, Is Long-Term Resistance Level Next?

NYSE Margin Debt Chart

Source: Bloomberg. Data as of August 30, 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

It appears that $1,300 was an intermediate hurdle on the way to testing long-term resistance in the $1,375 to $1,400 range. A move through $1,400 would create new longer-term highs and likely transform this base-forming market into a bull market. The gold price rarely makes yearly highs in the summer, and this makes August's performance impressive. Historically, fall has been the strongest season for gold prices. However, the seasonal pattern has been lost for several years due mainly to a chaotic Indian market where tax changes, trade restrictions, and currency policies have hampered demand. Normality has returned to the Indian market this year and with a good monsoon, the fall festival and wedding seasons should be supportive of gold prices. As such, we expect gold to test the $1,375 to $1,400 resistance level later this year. Getting through resistance would likely allow a new level of fundamental risk to come into view. Geopolitical risk tends to cause price spikes that dissipate on signs of de-escalation. There might be further tensions around North Korea. Armed conflict would move gold substantially, but we would be surprised if all sides would allow such an apocalyptic outcome to occur.

It is more likely that the next gold driver emerges from macroeconomic changes. One possible reason Fed Chair Yellen gave no rate guidance in her Jackson Hole address is that she might like to see the market's response to the Fed's plan to unwind its $4.5 trillion balance sheet first, which it is expected to unveil in September. This might create unwanted shifts in the bond markets that the Fed has been supporting. If the president's tax plans meet the same fate as his health care initiative, confidence in Washington will erode further. Gold might also receive a boost if the New Year arrives without a third Fed rate increase.

Escalating Risks, Especially in U.S., Fueling Gold Drive Ahead

Regardless of whether gold makes new multi-year highs this year, we believe financial and economic risks will escalate in the foreseeable future that are likely to drive gold to $1,400 and beyond. This is certainly a counterintuitive outlook when the economy is at full employment, major stock indices recently hit all-time highs, and consumer confidence as measured by both the Conference Board Consumer Confidence Index4 and University of Michigan Consumer Sentiment Index5 are at long-term highs. However, this is an environment in which complacency sets in and risks are ignored. The economic cycle appears to be nearing its end, especially in the U.S.

The Fed has once again waited too long to normalize monetary policy. Now it is in the process of cutting off the fuel that has been feeding asset price inflation and bubbles, such as the mania in FAANG stocks (Facebook, Amazon, Apple, Netflix, Google), Tesla, and Bitcoin. Automotive sales have peaked as car loan delinquencies escalate. The housing market appears to have topped out. The number of distressed and delinquent commercial real estate properties have increased lately. The Federal Deposit Insurance Corporation (FDIC) reports that total loans and leases by banks and other institutions has decelerated while credit card charge offs are on the rise. Leading economic indicators have stagnated. We should know in the coming year whether this is a pause or a peak.

Debt Level Danger Continues to Loom Over Economy

Overwhelming debt levels in many areas of the economy probably represent the biggest threat in a downturn. The Congressional Budget Office (CBO) expects the federal deficit to rise to $693 billion, or 3.6% of GDP, in the fiscal year ending Sept 30. Why is there a deficit at all in the ninth year of the expansion and a 4.4% jobless rate? U.S. household debt reached a record $12.7 trillion in the first quarter. Over the past two years, the personal savings rate has declined from 6.3% to 3.7% as consumers tap savings to pay for their lifestyles or needs. Rising debt without a commensurate rise in GDP, wages, or productivity means that capital has been misallocated and that the economy is simply borrowing growth and output from the future.

Is Insurance Sector of 2017 the Housing Sector of 2008?

The last economic downturn impacted the housing market like few expected. Likewise, the next downturn will probably have an unpredictable impact on other unsuspecting sectors. For example, a study by BlackRock Inc., highlighted in a recent Bloomberg article, found that in a financial crisis the insurance industry would suffer worse losses than it did in the subprime crisis. The reason is that since the Fed has held rates at artificially low levels, insurers have taken on riskier and less liquid assets than their traditional holdings of vanilla bonds in order to generate acceptable returns. We suspect pension funds and other institutions might have similar positioning.

Risks Mount Outside of U.S. Too

There are also substantial risks outside of the U.S. that could have global repercussions. The Institute of International Finance Global Debt Monitor Report estimates the global debt in early 2017 set a new record of $217 trillion (327% of GDP), up 46% from $149 trillion in 2007 just before the global financial crisis. In an August 5 report, Crescat Capital compares credit bubbles historically with the current debt levels in China, Australia, and Canada – all linked through the commodity and real estate trades. Crescat believes China's banking bubble today is over three times larger than the U.S. banking bubble prior to the global financial crisis.

While we are always hopeful for a prosperous future, we live in a world with risks that might impact our investments. We find no reason to believe there won't be another economic cycle, as there has been throughout history. As the upleg of this cycle is one of the longest on record, it is probably not a bad idea to think about portfolio insurance or defensive positioning.

Download Commentary PDF with Fund specific information and performance

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No Summer Doldrums for International Moats https://www.vaneck.com/blogs/moat-investing/no-summer-doldrums-for-international-moats/ International moat companies continued their summer strength, while U.S. moats got a case of the summer doldrums.

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VanEck Blog 9/7/2017 12:00:00 AM

For the Month Ending August 31, 2017

Performance Overview

International moat stocks continued to display summer strength, gaining 0.91% in August as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), compared to 0.52% for the MSCI All Country World Index ex USA (MSCI ACWI ex-USA). This extended the International Moat Index's one year outperformance to more than 10% (28.93% versus 18.88% for the MSCI ACWI ex-USA), based on the twelve months ending August 31, 2017. For U.S. moats, the summer doldrums continued in August, with the U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") returning -0.69% versus 0.31% for the S&P 500® Index.

International Moats: Buildings and Cell Phones

Real estate and telecommunications were the top contributors to the performance of the International Moat Index in August. Mobile Telesystems PJSC (MTSS RM, +18.42%) was the leading performer for the month. MTSS is the largest wireless carrier in Russia and has held up well relative despite Russia's struggling economy. Real estate developer Cheung Kong Property Holdings (1113 HK, +8.39%) was the leader in the Index's strong real estate sector which is comprised by mostly Asian companies. By contrast, India car producer Tata Motors Ltd. (TTMT IN, -14.98%) was the International Moat Index's bottom performer, although it was able to maintain its moat rating on the back of its strong Jaguar and Land Rover brands. Ireland's bio-tech Shire (-12.07%) and Canada's Baytex Energy (BTE CN, -9.94%) also struggled in August.

U.S. Domestic Moats: L Who?

The overwhelming detractor from the U.S. Moat Index's performance in August was L Brands, Inc. (LB US, -20.68%). The company's tough performance in July was followed by an even tougher results in August. The retail conglomerate, best known for its Victoria's Secret brand, has struggled lately, and Morningstar analysts lowered its fair value price by $2 in August citing weaker-than-expected near-term earnings following the second quarter earnings report. Even so, Morningstar recently reaffirmed its moat rating in an August research note: "We continue to think that L Brands has a wide economic moat, with brand strength in a category characterized by high levels of consumer brand loyalty and prioritization of quality and fit over price." Walt Disney Co. (DIS US, -7.94%) was another top detractor from the consumer discretionary sector. Disney continues to suffer from declines in its studio and consumer products segments, even though the company has enjoyed strong growth in its parks and resorts. Notably, the information technology was the top contributing Index sector in August, while the healthcare sector was relatively flat; strong performance of biotech firms was offset by weak performance from healthcare distribution companies.

 

(%) Month Ending 8/31/17

Domestic Equity Markets

International Equity Markets

(%) As of 8/31/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 8/31/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
Gilead Sciences, Inc. GILD US 10.01
Varian Medical Systems, Inc. VAR US 9.40
Biogen Inc. BIIB US 9.31
C.H. Robinson Worldwide, Inc. CHRW US 8.33
Bristol-Myers Squibb Company BMY US 6.29

Bottom 5 Index Performers
Constituent Ticker Total Return
Patterson Companies, Inc. PDCO US -7.72
Walt Disney Company DIS US -7.94
Allergan plc AGN US -8.78
AmerisourceBergen Corporation ABC US -14.07
L Brands, Inc. LB US -20.68

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
Mobile TeleSystems PJSC MTSS RM 18.42
IOOF Holdings Ltd IFL AU 11.91
SFR Group SA NUM FP 10.12
Cheung Kong Property Holdings Limited 1113 HK 8.39
Elekta AB Class B EKTAB SS 8.19

Bottom 5 Index Performers
Constituent Ticker Total Return
Crown Resorts Limited CWN AU -9.40
Baytex Energy Corp. BTE CN -9.94
QBE Insurance Group Limited QBE AU -10.68
Shire PLC SHP LN -12.07
Tata Motors Limited TTMT IN -14.98

View MOTI's current constituents

As of 6/16/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
L Brands Inc LB US
T Rowe Price Group Inc TROW US
CH Robinson Worldwide Inc CHRW US
General Electric Co GE US
BlackRock Inc BLK US
John Wiley & Sons Inc. A JW/A US

Index Deletions
Deleted Constituent Ticker
Mead Johnson Nutrition Co MJN US
Jones Lang Lasalle Inc JLL US
CBRE Group Inc. CBG US
Mastercard Inc A MA US
Varian Medical Systems Inc VAR US
Cerner Corp CERN 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
Roche Hldgs AG Ptg Genus Switzerland
Telefonica SA Spain
Bayer Motoren Werke AG (BMW) Germany
Potash Corp of Saskatchewan Canada
China Resources Gas Group Ltd. China
Canadian Imperial Bank of Commerce Canada
Westpac Banking Corp Australia
SFR Group France
Mobile TeleSystems PJSC Russian Federation
Wipro Ltd India
Koninklijke Philips Electronics NV Netherlands
Meggitt United Kingdom
Novartis AG Reg Switzerland
America Movil SAB de CV L Mexico
Murata Manufacturing Co Ltd Japan
DBS Group Holdings Singapore
HeidelbergCement AG Germany
Commonwealth Bank Australia Australia
National Bank of Canada Canada
Ansell Ltd Australia
Julius Baer Group Switzerland

Index Deletions
Deleted Constituent Country
Kao Corp Japan
Seven & I Holdings Co Ltd Japan
William Demant Hldg Denmark
Telstra Corp Ltd Australia
Carsales.com Ltd Australia
DuluxGroup Ltd Australia
Fisher & Paykel Healthcare Corporation Limited New Zealand
Swire Properties Ltd Hong Kong
Infosys Ltd India
Tata Consultancy Services Ltd India
Ramsay Health Care Ltd Australia
Airbus SE France
Singapore Exchange Ltd Singapore
GEA Group AG Germany
London Stock Exchange Plc United Kingdom
Vicinity Centres Australia
China Mobile Ltd. China
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Iluka Resources Ltd Australia
KDDI Corp Japan

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



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What Drives Green Bond Returns? https://www.vaneck.com/blogs/etfs/what-drives-green-bond-returns/ While green bonds are similar to conventional bonds in terms of traditional performance drivers, investors get the added benefit of a green “bonus”.

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VanEck Blog 9/6/2017 12:00:00 AM

Green bonds finance projects with a positive environmental impact, which gives them a specific focus beyond most non-green "conventional" bonds. But in terms of their yield and performance, green bonds are generally driven by the same factors that impact most conventional bonds.

Similar Return Drivers as Other Bonds

Conventional bond returns are driven primarily by changes in interest rates, the market's perception of credit risk, and when investing globally, currency appreciation or depreciation. Supply and demand, liquidity, and other contractual terms of the obligation (e.g., callability) also have an impact. Green bonds are no different from conventional bonds in this regard. Drivers of risk and return are the same because green bonds are backed by the full balance sheet of the issuer in the vast majority of cases. Although green bond proceeds are used only to finance environmentally friendly projects, the payment of principal and interest is not contingent on the success or failure of these projects.1

As the drivers of risk and return for a green bond and a conventional bond from the same issuer are identical (all else being equal), one might expect yields to be in line. Anecdotally this is the case. Underwriters generally report that new green bonds are issued on the issuer's yield curve (or perhaps slightly above to reflect a new issue discount, which is common for any new bond issue). On the other hand, despite the rapid growth in green bond issuance over the past few years, there is significant demand for new green bonds and new issues tend to be heavily oversubscribed. This has led to a perception that a green bond premium has developed, allowing issuers to pay lower yields on bonds carrying a green label versus conventional bonds.

Does the Green "Bonus" Create a Premium?

A new study by the Climate Bonds Initiative is the first to take an analytical approach to studying whether or not a green bond "premium" exists. The conclusion? It depends. Some green bonds have priced inside the issuer's yield curve, some priced on it, and others have priced above. As the report points out, "this is broadly comparable to vanilla bonds". It is worth noting that the study is somewhat limited in scope, and given the rapid growth and evolution of the green bond market, it may not reflect future market dynamics.

As shown in the charts below, our own analysis of four notable green bond issues also finds that they were generally issued on or slightly above the curve at the time of issuance, and have generally continued to price in line with the issuers' other bonds in the secondary market.

Notable Green Bond Issues  Chart

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

Intuitively this makes sense. Most investors are not willing to accept a lower yield versus other comparable bonds in the market, despite the green aspect of the bond. While high demand may cause a particular green bond's yield to tighten in the secondary market (due to buying from those who were not able to get an allotment of the new issue, for example), it is unlikely to deviate significantly versus the issuer's overall yield curve. Expected growth in new issuance would also help to alleviate supply and demand imbalances. Further while green bonds are generally oversubscribed, this is broadly true across the bond market.

Added Stability From a Diverse Investor Base

Provided that a green bond trades in line with an issuer's other bonds, what is an investor getting? In a sense, it is a win-win. Green bond investors can potentially earn market rates of return but are also able to direct capital towards projects helping address climate change or other environmental issues. Also, the green label can reduce search costs for investors, along with other indicators such as the Climate Bonds Initiative flag which indicates that the projects financed are in line with the organization's taxonomy.2 Lastly, the green label may help to diversify the investor base for a particular bond, attracting both traditional fixed income investors as well as institutional green bond investors, which generally take a buy-and-hold approach. This diversity could conceivably help provide stability in a market selloff.

Sustainable Long-Term Returns

From a fundamental standpoint, a green bond should provide the same level of returns as a conventional bond from the same issuer. However, it is worth noting that by issuing green bonds, issuers are taking steps to address the long-term climate risks that could potentially affect their creditworthiness. By strategically addressing and potentially mitigating these risks through the issuance of green bonds or through other initiatives, these issuers may ultimately be rewarded with a lower cost of capital while investors potentially benefit from sustainable long-term returns, versus investment in issuers with higher levels of climate risk.

VanEck Vectors Green Bond ETF (GRNB) is the first U.S.-listed fixed income ETF to provide targeted exposure to the fast-growing green bonds 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.

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Real Yields Rule: Emerging Markets Local Bonds Lead the Way https://www.vaneck.com/blogs/emerging-markets-bonds/real-yields-rule/ VanEck Blog 8/31/2017 12:00:00 AM

Looking for attractive yields? Look no further than emerging markets local currency bonds. These bonds provide significantly higher yields than those offered by developed markets bonds, both in nominal terms and in real terms, i.e., after adjusting for expected inflation. While higher yields often mean greater credit risk, local inflation levels can be a greater contributor to the nominal yields of emerging markets bonds.

Hawkish Steps Keep a Lid on Emerging Markets Inflation

The higher nominal yields of emerging markets local bonds compensate U.S. dollar-based investors for the risk posed by local inflation, which can be associated with negative currency returns, particularly if inflation goes unchecked. But controlled inflation and positive real interest rates can generally be supportive for a local currency. In addition, positive real rates provide more room for emerging markets central banks to ease monetary policy if economic growth slows. This conventional policy tool may not be as effective in developed markets currently, given extremely low or even negative rates.

Real yields can also provide an indication of fundamental value versus looking only at nominal yields. As shown in the chart below, real yields among emerging markets economies (blue line) appear high relative to historical levels, and the differential between emerging markets and developed markets real yields (gray line) is attractive (the latest data show a 200 basis point yield advantage for Emerging Markets).

Emerging Markets Real Yields Are Attractive

Emerging Markets Real Yields Are Attractive Chart

Source: JPMorgan. Country index yields for GBI-EM and GBI (DM) deflated by 12mo CPI and weighted by index weights, and GBI-EM deflated by 12mo CPI expectations.

Inflation has generally remained under control in recent years in the countries represented in the J.P. Morgan GBI-EM Global Core Index. Even in countries where inflation has been more of a concern (e.g., Mexico and Argentina), central banks have taken hawkish steps, including raising interest rates, and inflation is expected to slow. As of July 31, 2017, the weighted average real 10-year government yield of countries in the Index was 2.3%.1 In other words, investors were receiving 2.3% above expected inflation. To put that into context, the real yield on U.S. government bonds was only 0.15%, and negative in other developed markets.

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Cybersecurity and Municipal Bonds: Part 2 https://www.vaneck.com/blogs/muni-nation/cybersecurity-municipal-bonds-part-2/ Part 2 in our series addresses how cybersecurity issues impacting the municipal bond market are being addressed by government and private sector initiatives. 

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VanEck Blog 8/24/2017 12:00:00 AM

Addressing the Issues

This is part two of a three part series by Jim Colby, Municipal Bond ETF Portfolio Manager at VanEck, that explores the intersection between cybersecurity and the municipal bond market. Part 1 looks at what is at stake; Part 2 describes ways in which these issues can be addressed; and Part 3 discusses possible drivers to action.

We have firmly established that cybersecurity is a critical issue in the muni space – an arena that impacts the everyday lives of all Americans. Now let's look at how cybersecurity issues are already being addressed through two important initiatives that have been developed by the federal government and the private sector.

Creation of the NIST Cybersecurity Framework under Obama

Cybersecurity's importance is being recognized at the highest levels. Help from our central government in Washington DC in tackling cybersecurity issues has been available to state and local governments (and others) for some time.

On February 12, 2013, President Barack Obama issued the first executive order addressing cybersecurity: Executive Order (EO) 13636 entitled "Improving Critical Infrastructure Cybersecurity". The order directed the Executive Branch to "enhance the security and resilience of the Nation's critical infrastructure".1

One of the most important things resulting from EO 13636 has been the "Framework for Improving Critical Infrastructure Cybersecurity"2 developed by the National Institute of Standards and Technology's (NIST). The NIST Cybersecurity Framework follows a set of industry standards and best practices to help organizations manage cybersecurity risks, and was established through the collaboration of the government and the private sector.

Critical Infrastructure Sectors1

  • Chemical
  • Commercial Facilities
  • Communications
  • Critical Manufacturing
  • Dams
  • Defense Industrial Base
  • Emergency Services
  • Energy
  • Financial Services
  • Food and Agriculture
  • Government Facilities
  • Healthcare and Public Health
  • Information Technology
  • Nuclear Reactors, Materials, and Waste
  • Transportation Systems
  • Water and Wastewater Systems

NIST Cybersecurity Framework Becomes Policy under Trump

President Trump recognized the importance of standardizing cybersecurity practices by issuing EO 138003 on May 11, 2017. This EO turned the NIST framework into federal government policy that requires NIST to provide cybersecurity process frameworks for all federal agencies.4

NIST highlights the fact that cybersecurity cannot be addressed by technology alone. The NIST Cybersecurity Framework goes beyond technology and also addresses both people and processes. All are critical to solving cybersecurity issues. Just as importantly, whatever an organization's size, the degree of its exposure to cybersecurity risk, or its cybersecurity sophistication, the NIST framework can help it "to apply the principles and best practices of risk management."5

How Municipalities Benefit from NIST Framework

The NIST Cybersecurity Framework provides an important resource for municipal governments. State and local governments "face unique challenges due to limited resources, complex regulations, and an increasingly sophisticated threat environment,"6 according to global tech giant Cisco. The NIST Framework offers municipalities a proven risk-based approach to tackling cyberthreats, one that "reduces complexity and provides visibility, continuous control, and advanced threat protection across the extended network and attack continuum before, during, and after a cyberattack."7

US-CERT: A Safer, Stronger Internet for All Americans

Cybersecurity help is also available to state and local municipalities through US-CERT (the U.S. Computer Emergency Readiness Team), established in 2003. Its overall mission is to strive for "a safer, stronger Internet for all Americans by responding to major incidents, analyzing threats, and exchanging critical cybersecurity information with trusted partners around the world." One of US-CERT's critical mission activities is to provide timely and actionable cybersecurity information to state and local governments.

What Will Drive Municipalities to Take Action?

Part 3 will discuss possible drivers to action. Whether private or public, organizations need incentives to address cybersecurity. Come the day of reckoning when an organization/local or state government is held to cybersecurity ransom, any excuses will likely be recognized as hollow.

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Cybersecurity and Municipal Bonds: Part 1 https://www.vaneck.com/blogs/muni-nation/cybersecurity-municipal-bonds-part-1/ Portfolio Manager Jim Colby explores the intersection between cybersecurity and the municipal bond market. First, we look at what is at stake. 

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VanEck Blog 8/16/2017 12:00:00 AM

This is part one of a three part series by Jim Colby, Municipal Bond ETF Portfolio Manager at VanEck, that explores the intersection between cybersecurity and the municipal bond market. Part 1 looks at what is at stake; Part 2 describes ways in which these issues can be addressed; and Part 3 discusses possible drivers to action.

Cybersecurity Challenges Impact Government: At Federal, State, and Local Levels

The importance of cybersecurity has never been more apparent. Cybersecurity issues are a growing challenge that impact many aspects of our economy, including most of the services provided by municipal borrowers.

Although not readily obvious, municipal services are vital to the smooth running of daily life. These services run the gamut, including funding and managing traffic lights, supplying electric and sewer services, water supply, maintaining/building roads, building bridges, supervising elections, running hospitals, and providing mental and physical health support.

Safeguarding municipal services is vital at all levels: federal, state, and local. Both government and the private sector are spearheading important security initiatives to meet the growing cybersecurity challenges that are involved.

What is at Stake?

Municipal governments are involved in most aspects of our lives, and each service provided is subject to unique cybersecurity issues.

Here is just one example.

Municipal governments collect (and need to "safeguard") a tremendous amount of information – any or all possibly containing personally identifiable information (PII) or sensitive personal information (SPI) – including, of course, Social Security numbers. Examples of how this information is collected include house deeds, mortgage documents, records of births, marriages, deaths, medical records, driver licenses, and court documents (e.g., divorce settlements).

Both PII and SPI are subject to the impacts of cybersecurity personal identity theft, and awareness of identity and access management (IAM) is playing an evolving role in tightening cybersecurity frameworks in both the public and private sectors.

Examples: Federal Cybersecurity Incidents

Each year, in a report to Congress, the Office of Management and Budget (OMB) provides "summary information on the number of cybersecurity incidents that occurred across the government and at each Federal agency."1 These incidents are notable not only for their number, but also for their variety, as shown in the following table.

Federal Agency Reported Incidents by Attack Vector – Fiscal Year 2016

Attack Vector Description CFO* Non-CFO* Govt-wide
Attrition Employs brute force methods to compromise, degrade, or destroy systems, networks, or services. 108 1 109
E-mail/Phishing An attack executed via an email message or attachment. 3,160 132 3,292
External/Removable Media An attack executed from removable media or a peripheral device. 132 6 138
Impersonation/Spoofing An attack involving replacement of legitimate content/services with a malicious substitute. 60 4 64
Improper Usage Any incident resulting from violation of an organization’s acceptable usage policies by an authorized user, excluding the above categories. 3,920 210 4,130
Loss or Theft of Equipment The loss or theft of a computing device or media used by the organization. 5,313 377 5,690
Web An attack executed from a website or web-based application. 4,766 102 4,868
Other An attack method does not fit into any other vector or the cause of attack is unidentified. 11,365 437 11,802
Multiple Attack Vectors An attack that uses two or more of the above vectors in combination. 789 17 806
Total   29,613 1,286 30,899

Source: FISMA FY 2016 Annual Report to Congress.
* Chief Financial Officers Act agencies are those agencies designated in the CFO Act (with the addition of Department of Homeland Security and minus the Federal Emergency Management Agency). In practice, the CFO Act agencies are the 24 largest Federal agencies in terms of budget; the 23 civilian CFO Act agencies are the CFO Act agencies minus the Department of Defense.

Examples: Municipal Cybersecurity Incidents

The breadth of cybersecurity incidents that can impact municipalities is deep and wide. The following are a sample of notable cybersecurity incidents that have impacted the municipal space over the past several years.

Personal Information

October 2014 – Personal information, including Social Security numbers, of more than 850,000 people possibly compromised when hackers gain access to Oregon Employment Department database.2

February 2016 – Hollywood Presbyterian Medical Center pays 40 bitcoin (around $17,000) to hacker who "seized control of the hospital's computer systems and would give back access only when the money was paid."3

Services

August 2003 – On August 14, 2003, nearly 14 years ago, millions of people in both Canada and the U.S. were hit by the great Northeast blackout caused primarily by a software bug. There was no power to run the trains, and no power for pumping domestic fresh water, treating raw sewage, running lighting, refrigerators, and air conditioning, filling up with gasoline, accessing electronic airline tickets, running cable TV, and recharging cell phones. This situation was caused by a software accident, and not a breach cybersecurity, but its impact was enormous.

Fast forward to 2015 in Ukraine.

December 2015 – It was certainly no accident on December 23, 2015, when malicious hackers deprived some 230,000 people in the Ivano-Frankivsk region of West Ukraine of power for up to six hours. The power company Prykarpattyaoblenergo's control center had fallen victim to a sophisticated cyberattack.

Although this happened many thousands of miles away, according to one article: "the control systems in Ukraine were surprisingly more secure than some in the U.S."4 Should a future power grid cyberattack occur in the U.S., the impacts could be enormous. While the event in Ukraine may have affected only 230,000 people, the Northeast blackout of 2003 was estimated to have affected at least 55 million people in both Canada and the U.S. Eleven people died.5

March 2016 – The U.S. Justice Department indicted seven Iranians not only for cyberattacks on a number of American banks, but also for trying to take over the controls of a small suburban dam in Rye, New York.6

How Can These Cybersecurity Issues be Addressed?

The next piece in our three part series will describe some ways in which the issues can be, and already are being, addressed. For some years now, initiatives have existed both to "enhance the security and resilience of the Nation's critical infrastructure"7 and provide "timely and actionable information" to "state, local, tribal and territorial (SLTT) governments."8

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Take a Deep “Breadth” of the Bullish Air https://www.vaneck.com/blogs/allocation/breadth-of-bullish-air/ For August, the Fund’s allocation shifted slightly from neutral to slightly overweight stocks.

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VanEck Blog 8/16/2017 12:00:00 AM

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.

July Performance

VanEck NDR Managed Allocation Fund (NDRMX) returned 1.39% versus 1.87% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index), and 1.58% for the Morningstar Tactical Allocation Peer Group average.

The Fund lagged its benchmark in July due to both its slight underweight exposure to global stocks and its lack of exposure to Emerging Markets equities. Global stocks (MSCI All Country World Index) returned 2.83% and emerging markets equities (MSCI Emerging Markets Index) returned 6.04%. The Fund's top performing positions were its equity holdings within the U.S., Japan, and Europe ex U.K. Within the U.S., the Fund benefited from a large overweight position in large-cap growth stocks. U.S. large-cap growth (Russell 1000 Growth Index) returned 2.66% and outperformed both value and small-cap stocks.

Fund Positioning August 2017: Shift from Neutral to Moderately Bullish

At the start of August, VanEck NDR Managed Allocation Fund's (NDRMX) position shifted from neutral to slightly overweight stocks in August. The Fund's equity allocation increased from 58.9% to 65.2%, the bond allocation decreased from 40.5% to 34.3%, and the minimal cash position remained basically unchanged at 0.5%. The largest regional equity allocation shifts were an increase in exposure to the U.S. (34.1% to 39.9%) and the Emerging Markets (0% to 3.4%), and reductions to Europe ex U.K. (12.8% to 10.7%) and Japan (12.0% to 10.4%). Within the U.S. market cap and style positioning, the overweight exposure to large-cap growth was reduced and the exposure to large-cap value was increased.

Fund Positioning July 2017 Pie Charts

Source: VanEck. Data as of August 5, 2017.

July 2017 Performance Review

July was a great month for stocks. In fact, 2017 has been a great year for stocks, thus far. U.S. stocks (S&P 500® Index) are up 11.59%, global stocks (MSCI All Country World Index) are up 14.98%, and Emerging Markets stocks (MSCI Emerging Markets Index) are up 25.74%. For the seven month period, the Fund is up 9.20%.

Global Balanced Positioning Relative to Neutral*

Global stocks returned 2.83% and U.S. bonds returned 0.43%. The Fund was slightly underweight stocks (by approximately 1%) versus bonds in July. This small underweight position detracted from performance given the significant outperformance of stocks relative to bonds.

Global Regional Equity Positioning Relative to Neutral*

The performance of the regional equity positioning was mixed. The Fund was underweight the Emerging Markets, which was the largest regional equity detractor from performance. This was offset by winning overweight positons within the U.S., Japan, and Europe ex U.K.

U.S. Cap and Style Positioning Relative to Neutral*

The positioning within the U.S. contributed to performance. The Fund was overweight growth over value and large-cap over small-cap. Large-cap growth (Russell 1000 Growth Index) outperformed large-cap value (Russell 1000 Value Index) by 1.33%, and large-cap (Russell 1000 Index) outperformed small-cap (Russell 2000 Index) by 1.24%.

Total Returns (%) as of July 31, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.39 12.08
Class A: Maximum 5.75% load -4.45 6.79
60% MSCI ACWI/
40% BbgBarc US Agg.1
1.87 11.43
Morningstar Tactical Allocation
Category (average)2
1.59 9.26
Total Returns (%) as of June 30, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
0.18 11.68
Class A: Maximum 5.75% load -5.57 6.02
60% MSCI ACWI/
40% BbgBarc US Agg.1
0.26 10.49
Morningstar Tactical Allocation
Category (average)2
0.11 8.12

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: NDR Global Breadth Indicator Turns Bullish

The Fund's stock allocation increased from 59% to 65% based on increased technical strength. The specific indicator that became bullish is the NDR Global Breadth Indicator. "Breadth" is a measure of participation and this specific breadth indicator measures the percentage of countries in the MSCI All Country World Index that are trading above their 50-day moving average.

This measurement is important because it provides insight into the health of a market rally. On the one hand, investors should be cautious if the global stock market is rising because only one or just a few countries are performing well and pulling the Index forward. A rally without broad participation is usually a rally that should be viewed with extreme skepticism. On the other hand, if the majority of the countries in the Index are participating in the rally, then there is perhaps more comfort given the potentially higher likelihood that the rally will last.

NDR Global Breadth Indicator

NDR Global Breadth Indicator Chart

Source: Ned Davis Research. Data as of July 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.

Seasonality is another indicator that recently changed. 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 neutral to bearish.

As you can see from the following chart, March and April have been strong performance months for stocks, while the spring and summer months, starting in May and ending in October, have historically lagged. Hence the old adage: sell in May and go away.

NDR Seasonality Indicator

NDR Seasonality Indicator Chart

Source: Ned Davis Research. Data as of July 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 bullish global breadth reading and the bearish seasonality reading are at odds. There are five technical indicators and six non-price-based indicators (i.e., macroeconomic and fundamental) that determine the stock relative to bond allocation. Three of five technical indicators and three out of the six non-price-based indicators are bullish. Therefore, the overall composition of indicators, or what NDR refers to as the weight-of-the-evidence, has caused the equity allocation to become slightly overweight, increasing from 59% in July to 65% at the beginning of August.

Additional Resources

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3Q’17 Investment Outlook: Emerging Markets and Digital Asset Opportunities https://www.vaneck.com/blogs/market-insights/3q-17-investment-outlook-eme-digital-assets/ At the beginning of 2017, we felt that we were in a long, slow, rising interest rate environment. We still feel that this is the case now.

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VanEck Blog 8/14/2017 12:00:00 AM

Watch Video 3Q'17 Investment Outlook  

Jan van Eck, CEO, shares his investment outlook.

Watch Now  



Investors Should Remain Mindful of Slow and Sustained Rising Interest Rates

TOM BUTCHER: Jan, last time we spoke you cautioned investors about being prepared for rising interest rates, would you still do so?

JAN VAN ECK: Yes. At the beginning of 2017, we felt that we were in a long, slow, rising interest rate environment. We still feel that this is the case now in the summer of 2017. I think that investors can adjust by looking at fixed income solutions that are not negatively impacted by this gradual increase in duration risk. Thus far, we had thought that both high yield and emerging markets (EM) debt were attractive places for investors to look, and indeed, both asset classes have done well YTD in 2017. I think that what we saw in the first half, and what is worth noting, is that Europe has gotten "onboard the train." Let us call them two years behind the United States in terms of a gradual move away from very stimulative central bank policies, because, among other things, the European economy is relatively strong. They are trailing us in terms of rate policies, so that will be an interesting development to watch.

BUTCHER: Would you suggest that investors make any further preparations given the current environment?

Fixed Income is an Attractive Alternative: High Yield and Local Currency Emerging Markets Debt

VAN ECK: No. I think we have seen that, despite a slight increase in interest rates, fixed income can offer diversification and can still provide positive overall positive returns, as well as coupons, in this kind of environment. Just diversify: That was – and continues to be -- our message, and we view high yield and local currency emerging markets debt as good asset classes to consider.

These are the Early Innings for Emerging Markets Equities

BUTCHER: Emerging markets equities have had a pretty good first half. Where do you see this asset class going in the second half of 2017?

VAN ECK: I think we are in the early innings for emerging markets equities. Emerging markets have underperformed the U.S. for five years. To date in 2017, emerging markets company profits have grown at their highest rates since 2011, and the asset class is very attractive. This strength has driven the near 20% returns in emerging markets thus far this year.1 But we believe that we are just at the beginning of this positive cycle. Commodities hurt Latin American earnings over the last several years, and we think that this is behind us, and that we have a very nice base going forward. The possible mistake for investors would be to miss the early innings of what we see as a positive cycle. (Read July 17 blog post for more on emerging markets equities: Growth Expectations Driving Emerging Markets.)

Slow, Grinding Commodities Rally Provides Investment Opportunity

BUTCHER: Let’s turn to commodities. Both oil and energy stocks have had a pretty difficult first half. Do you view the current levels as a buying opportunity?

VAN ECK: Commodities had an 80 month bull market in the last decade, and then a very difficult bear market which we believe bottomed in the first quarter of 2016. We did say, however, that there was going to be significant adjustment needed as prices continue to rise, which would require different corporate behavior and better use of capital. Frankly, investors just voted "no" in the second quarter to energy stocks. Oil prices fell a little bit, but it was due to concerns about inefficient use of capital. By contrast, mining companies performed reasonably well. We felt that this was going to be a slow "grind" of commodity cycle. If we continue to be correct in that view, then this might be a good buying opportunity. That is the view we having been sticking with throughout 2017. (Read July 20 blog post for more on commodities: Early Cycle Pause Motivated by Skepticism, Not Data.)

VanEck Natural Resources Conference 2017: Reshaped Companies,
Revitalized Sectors

BUTCHER: VanEck had a very successful natural resources conference in Denver in June: VanEck Natural Resources Conference 2017. What were your key takeaways and what do you think made it so special?

VAN ECK: We had a full day of meetings with company managements from energy and mining companies. This was a follow up to the first conference we held in 2016. The big reminder I get from our conferences is how difficult it is to manage in this variable macro environment. I am also impressed with the strong management teams of the companies that we own in our portfolios. We always track the macro environment, but we like to pick what I call the FANG1 stocks in the resources world. That means what has worked in the technology world (for the Facebooks, Amazons, Netflixes, and Googles, i.e., incredible profitably and high growth rates. That is what we are looking for. We want the low cost winners in the energy world, and it was great to spend quality time with those management teams.

The Advent of Digital Assets: What is their Long Term Potential?

BUTCHER: Digital assets seem to be in the press more. What do you think about cryptocurrencies and distributed ledgers?

VAN ECK: This is a new and dynamic arena that merits attention. One of my colleagues called bitcoin "gold for 23 year olds." Which I think is a nice summary, because the investment appeal of a digital asset is that it is not linked to government policy. It is completely off on its own. The question is: Is there any long term intrinsic value to these digital assets? I think that the technology of a distributed ledger is very powerful because you can have an instantaneous version of the truth that is shared. The crowd, as you know, can adopt technologies at exponential rates. Those are the positives. The negatives are that most of the database designs or distributed ledgers are not run by a particular person, as generally companies are run (like corporate software, for example, Microsoft), but are run more by a crowd. Whether the crowd can actually govern these distributed ledgers or not is a fundamental existential question. In the meantime, digital assets are certainly a promising technology and we are eager to see if they will find real life applications and provide investment opportunity. (Read August 10 blog post for more on digital assets: Gold Sets a High Bar for Bitcoin.)

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Gold Sets a High Bar for Bitcoin https://www.vaneck.com/blogs/gold-and-precious-metals/gold-sets-high-bar-for-bitcoin/ Gold rallied 2.25% in July despite heavy gold bullion ETP redemptions. We compare bitcoin and gold and explore the growth of digital currencies.

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VanEck Blog 8/10/2017 12:00:00 AM

Gold Bullion Rallies in July

The monthly low for gold came on July 10 at $1,204 per ounce. Gold then rallied to finish July at $1,269.44 per ounce, a gain of $27.89 (2.25%; YTD gold bullion has gained 10.17%). This was the third time this year that gold has successfully tested the $1,200 level. Although the U.S. dollar had a precipitous fall in July, it was not the primary driver for gold. Thus far in 2017 gold has been responding more to changes in real interest rates. Gold has an inverse correlation to real interest rates, which moved higher early in the month (coinciding with gold lows) before trending lower. The change in direction for gold and interest rates was driven by somewhat dovish Congressional testimony by Federal Reserve Chair Janet Yellen, which the market interpreted as an indication that another Fed rate increase this year is less likely.

July Gains Impressive Given ETP Redemptions

July saw heavy redemptions in the gold bullion exchange traded products. Physical demand from Asia is typically low during the summer and there were not any significant moves in futures positioning. Normally this would contribute to price weakness, so July's modest gains for gold are somewhat impressive. It is possible that July's gains were driven by buying in the over-the-counter market (OTC), however there is no published data for OTC transactions. We do expect that more transparency for the OTC market will be available soon. The London Bullion Market Association (LBMA) and the London Precious Metals Clearing Limited (LPMCL) recently began releasing aggregate data on gold inventories in London vaults with a three month lag. Vaulting statistics are a first step and are likely to be followed by trade reporting at a later date.

Gold stocks moved slightly higher with the gold price. For July, the NYSE Arca Gold Miners Index (GDMNTR)1 gained 3.6% while the MVIS Global Junior Gold Miners Index (MVGDXJTR)2 advanced 0.20%. Gold stocks advanced despite heavy redemptions in gold stock ETFs, a situation that parallels the curious July relationship between the rising gold price and the gold bullion ETP redemptions. Markets don't always do what is expected of them.

Recent Momentum Suggests that $1,300 is Likely to be Tested

While $1,200 has proven to be a resilient floor for gold, the price has yet to trend through the $1,300 per ounce level. Twice this year gold turned down as it approached $1,300. The recent upward price trend suggests $1,300 may soon be tested for a third time. Gold prices typically trend higher in the fall as seasonal physical demand improves. In terms of identifying catalysts that might enable gold to break through $1,300, the most obvious candidate is economic weakness that might persuade the Fed to take a more cautious stance. The Fed is expected to announce plans in September to reduce its massive crisis-era balance sheet and there could also be significant risks surrounding these plans.

Gold is Physical, Bitcoin is Digital

Recently, we have received many questions about digital currencies and in particular, bitcoin (defined as the world's first decentralized digital currency). The queries range from our general opinion to concerns that bitcoin might displace gold demand. While we have no digital currency experts on our gold team, we follow the development of these new currencies with interest. It is clear that those who promote bitcoin are using gold's image to help validate their product. Press articles are often accompanied by a picture of stacks of shiny gold colored bitcoins. Bitcoins are created by “miners”. This is aimed at creating the illusion of a solid currency. In reality, digital currencies are strings of 0s and 1s stored in a computer in some unknown location and cannot be touched or seen.

There are, however, several important similarities between gold and bitcoin. Both are outside of the mainstream financial establishment. Both are not issued or controlled by governments, and both are traded around the globe across borders. Supply of both gold and bitcoin is limited, so they are sound forms of currency. For most transactions to be used in an economy, they must be converted into paper currency.

Gold versus Bitcoin

However, there are a range of significant differences:

  • Gold has been established as a store of wealth throughout human history. Gold's market capitalization is roughly $8 trillion, of which $3 trillion is in coin and bar form. Approximately $50 billion worth of gold trades each day. Bitcoin is microscopic in comparison with a market capitalization of approximately $45 billion and $1.5 billion in daily trading volume.
  • Gold can be stored anywhere. If stored at home, it can be used for barter the next time a hacker or solar flare takes down the grid. Digital currencies are worthless without electricity. Taking delivery will always be impossible with digital currency.
  • Bitcoin mining is a difficult concept to fathom. Bitcoin miners use computer programs to solve complex math problems and receive in exchange new bitcoins. What does this activity have to do with creating a store of wealth?
  • Most bitcoin markets are lightly regulated and are located outside of the U.S. A major potential drawback to digital currency is their use for money laundering, illegal trading, computer ransom attacks, tax avoidance, and to subvert exchange controls. Expect governments to intervene heavily if any of these activities become significant. Over the past year the People's Bank of China (PBOC) forced the three biggest bitcoin exchanges to adhere to anti-money laundering rules, implement trading fees, and then forced them to halt bitcoin withdrawals.
  • Distributed ledgers are promoted as unhackable. However, police were recently able to find the digital keys to an online criminal's accounts and seize approximately $8 million in digital currencies.
  • Digital currency has yet to stand the test of time. We do not know if a digital currency that is secure today will be secure under new technology. Distributed ledger passwords could be relatively easily broken if quantum computing becomes a reality.

Distributed Ledger Technology is Game Changing

The most significant development that has come out of the digital currency craze is validation of distributed ledger technology. This technology has the potential to revolutionize many aspects of the financial system, trade, and essentially anything where records are maintained. A secure system that eliminates middle men has obvious advantages. Imagine trading stocks without brokers, transfer agents, and custodians ― a scenario where fees are likely to disappear.

Distributed Ledger Technology Chart

Source: Capco.com.

Equally as significant, digital currencies have caused many to question what exactly a currency should be and whether there is a better alternative to fiat currency. The monetary system is broken. Central banks seem powerless to prevent the economy from going through busts that destroy wealth and create hardship. Currency volatility under the fiat system has been extreme. Politics, corruption, and mismanagement are a constant concern.

Technology Likely to Improve Gold Ownership Efficiency

Combining distributed ledger technology with an established sound and solid currency may provide the best alternative. To this end, later in 2017 the Royal Mint in the U.K. is set to launch Royal Mint Gold (RMG). RMG will be a digital record of ownership for gold stored at its vault, while CME Group will operate the product's distributed ledger platform. It will carry the option to convert to physical gold. It is not clear whether this product will enable consumer purchases with some type of RMG credit card. Regardless, technology is accelerating towards the day when gold can be used both as a store of wealth and an efficient medium of exchange.

Digital Currencies Are Not Likely to Replicate Gold's Unique Role

Bitcoin and other digital currencies are a fad that has attracted the attention of programmers, speculators, and early adaptors. Given the fundamental characteristics of gold and digital currencies, we do not believe digital currencies will ever replicate or replace gold's unique role as a form of portfolio insurance and as a hedge against tail risk. It is my opinion that governments will not allow digital currencies to reach the critical mass needed to challenge the utility of fiat currencies. At best, digital currencies may eventually occupy some middle ground as a niche product. At worst, they become a failed experiment that ends in tears. For now, the only thing we can forecast with confidence in the digital currency space is more volatility.

Download Commentary PDF with Fund specific information and performance

 

VanEck is considering distributing more research on digital assets. If you would like such information, please email us at digitalassets@vaneck.com.

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Keep an Eye on International Moats https://www.vaneck.com/blogs/moat-investing/eye-on-international-moats/ International moat stocks continued to rise in July with most sectors and countries contributing positively to performance. For U.S. moats, the mixed results of healthcare companies proved to be a hurdle. 

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VanEck Blog 8/9/2017 12:00:00 AM

For the Month Ending July 31, 2017

Performance Overview

International moat stocks posted strong results in July gaining 4.99% as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index") compared to a 3.69% rise for the MSCI All Country World Index ex USA. July's results extended the International Moat Index's YTD outperformance to 24.39% versus 18.30% for its counterpart. U.S. moats also maintained their YTD outperformance (14.91% versus 11.59%), despite retreating slightly in July. For the month, the U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") trailed the S&P 500® Index returning 0.92% versus 2.06%.

U.S. Domestic Moats: Healthcare Fatigue

The U.S. Moat Index's healthcare allocation delivered mixed performance and finished July relatively flat. Pharmaceutical and biotech names fared well during the month led by Gilead Sciences, Inc. (GILD US, +7.50%), and Biogen, Inc. (BIIB US, +6.72%). By contrast, medical distributors and pharmacy benefits managers such as Patterson Companies, Inc. (PDCO US, -10.60%) and Express Scripts (ESRX US, -1.88%) have struggled recently. Several financials firms excelled in July led by investment manager T. Rowe Price Group (TROW US, +11.47%) which boasted record levels of assets under management. Wells Fargo & Company (WFC US, -2.65%) was the only financial company to post negative returns in July, as it continues to be dogged by the fallout from overly aggressive past sales practices. Consumer discretionary was the top detracting sector for the U.S. Moat Index in July given poor results from L. Brands, Inc. (LB US, -13.92%). Victoria's Secret, L. Brands' top product line, saw second quarter sales decrease by 12%.

International Moats: Frisky Financials

Financial firms led the way in July for the International Moat Index as all 16 constituents from the sector posted positive performance. The Index's financial sector exposure was led by Belgian bank KBC Group (KBC BB, +8.96%), which has a sizable share of the Belgian and Czech Republic markets, and Chinese banks ICBC (1398 HK, +9.26%) and Oversea-Chinese Banking Corp (OCBC SP, +6.81%). KION Group (KGX GR, +13.27%), an industrial firm specializing in forklift production, was a top Index performer following better than expected quarterly results released late in the month. In July, healthcare was the only sector that detracted from Index performance, while no single country or regional allocation detracted from the Index. Several individual companies, however, did struggle in July, notably MGM China Holdings Limited (2282 HK, -11.45%) which now trades at a sizable discount to Morningstar's assigned fair value of 21 HKD.

 

(%) Month Ending 7/31/17

Domestic Equity Markets

International Equity Markets

(%) As of 7/31/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 7/31/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
T. Rowe Price Group TROW US 11.47
V.F. Corporation VFC US 7.97
Gilead Sciences, Inc. GILD US 7.50
Biogen Inc. BIIB US 6.72
Visa Inc. Class A V US 6.16

Bottom 5 Index Performers
Constituent Ticker Total Return
Zimmer Biomet Holdings, Inc. ZBH US -5.51
Varian Medical Systems, Inc. VAR US -5.88
Starbucks Corporation SBUX US -7.43
Patterson Companies, Inc. PDCO US -10.60
L Brands, Inc. LB US -13.92

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
Baytex Energy Corp. BTE CN 15.39
KION GROUP AG KGX GR 13.27
ENN Energy Holdings Limited 2688 HK 12.58
Wipro Limited WPRO IN 12.54
Tencent Holdings Ltd. 700 HK 12.20

Bottom 5 Index Performers
Constituent Ticker Total Return
Ansell Limited ANN AU -3.64
Sonic Healthcare Limited AHL AU -4.21
CSL Limited CSL AU -4.99
GlaxoSmithKline plc GSK LN -6.02
MGM China Holdings Limited 2282 HK -11.45

View MOTI's current constituents

As of 6/16/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
L Brands Inc LB US
T Rowe Price Group Inc TROW US
CH Robinson Worldwide Inc CHRW US
General Electric Co GE US
BlackRock Inc BLK US
John Wiley & Sons Inc. A JW/A US

Index Deletions
Deleted Constituent Ticker
Mead Johnson Nutrition Co MJN US
Jones Lang Lasalle Inc JLL US
CBRE Group Inc. CBG US
Mastercard Inc A MA US
Varian Medical Systems Inc VAR US
Cerner Corp CERN 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
Roche Hldgs AG Ptg Genus Switzerland
Telefonica SA Spain
Bayer Motoren Werke AG (BMW) Germany
Potash Corp of Saskatchewan Canada
China Resources Gas Group Ltd. China
Canadian Imperial Bank of Commerce Canada
Westpac Banking Corp Australia
SFR Group France
Mobile TeleSystems PJSC Russian Federation
Wipro Ltd India
Koninklijke Philips Electronics NV Netherlands
Meggitt United Kingdom
Novartis AG Reg Switzerland
America Movil SAB de CV L Mexico
Murata Manufacturing Co Ltd Japan
DBS Group Holdings Singapore
HeidelbergCement AG Germany
Commonwealth Bank Australia Australia
National Bank of Canada Canada
Ansell Ltd Australia
Julius Baer Group Switzerland

Index Deletions
Deleted Constituent Country
Kao Corp Japan
Seven & I Holdings Co Ltd Japan
William Demant Hldg Denmark
Telstra Corp Ltd Australia
Carsales.com Ltd Australia
DuluxGroup Ltd Australia
Fisher & Paykel Healthcare Corporation Limited New Zealand
Swire Properties Ltd Hong Kong
Infosys Ltd India
Tata Consultancy Services Ltd India
Ramsay Health Care Ltd Australia
Airbus SE France
Singapore Exchange Ltd Singapore
GEA Group AG Germany
London Stock Exchange Plc United Kingdom
Vicinity Centres Australia
China Mobile Ltd. China
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Iluka Resources Ltd Australia
KDDI Corp Japan

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



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Cost Leadership Creates Moats https://www.vaneck.com/blogs/moat-investing/cost-leadership-creates-moats/ Cost advantage is the second most frequent source of moat ratings according to Morningstar, but one of the hardest competitive advantages for a company to maintain. 

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

"How Moats Translate into Sustainable Competitive Advantages" is a five-part moat investing education series that explores the primary sources of economic moats. The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. According to Morningstar Equity Research, there are five key attributes that can give companies economic moats, and which are viewed as sources of sustainable competitive advantages: 1) Network Effect; 2) Intangible Assets; 3) Cost Advantage; 4) Switching Costs; and 5) Efficient Scale. Here we explore the concept of "Intangible Assets."

Cost Leadership Provides Market Control

The attribute of "cost advantage" is the second most frequent source of economic moat ratings according to Morningstar. Companies that are able to produce and offer products or services at lower costs than competitors are often able to achieve much higher profit margins. Within many industries, cost leaders have a distinct competitive advantage and often exert significant control over market prices. Morningstar Research explains cost advantage as:

Cost Advantage. Firms with a structural cost advantage can either undercut competitors on price while earning similar margins, or they can charge market-level prices while earning relatively high margins. For example, Express Scripts ESRX controls such a large percentage of U.S. pharmaceutical spending that it can negotiate favorable terms with suppliers like drug manufacturers and retail pharmacies.

Cost advantages are often gained through economies of scale, lower distribution and manufacturing costs, and/or access to a less expensive resource base. For moat-rated companies, cost advantage is one of the most difficult "moaty" attributes to maintain given the increasing competition in our modern global economy. For example, over the past 30 years, the U.S. manufacturing and consumer goods industries have been flattened by punishing price competition from overseas.

Economic Moat
Five Sources of Sustainable Competitive Advantage

Five Sources of Sustainable Competitive Advantage

Source: The Morningstar® Economic Moat Rating System.

Cost Advantage in Action: Four Case Studies of Moat Companies

To demonstrate the power of cost advantages in creating economic moats, we highlight four moat companies: U.S. based Starbucks and Compass Mineral, and international moat companies: Kao (Japan) and Ramsay Health Care (Australia).

Starbucks Corp (SBUX US) boasts a "wide economic moat" rating from Morningstar from two sources: its strong brand intangible asset and cost advantages: "We view Starbucks as one of the most compelling growth stories in the global consumer space today, poised for top-line growth and margin expansion through menu innovations, sustainable cost advantages, and evolution into a diversified retail and consumer packaged goods platform." Starbucks is best known for producing and serving premium coffee and espresso, and distributes a wide range of packaged products under several brand names. The company operates more than 13,500 locations in the U.S. (26,000 globally), which represents a sizable lead over competitor Dunkin' Donuts 8,900 U.S. locations. Morningstar believes that Starbucks has developed a strong brand that commands premium pricing and meaningful scale advantages, and that Starbucks should be able to maintain its leadership position while successfully accessing new growth avenues.

Compass Mineral International (CMP US) has been given a "wide economic moat" rating from Morningstar, based on an "enviable portfolio of cost-advantaged assets." Compass produces salt and magnesium chloride (used in highway de-icing), and plant nutrients including potash (a premium fertilizer) that it delivers mostly to North America. Compass is able to deliver de-icing salt at a low cost given its Goderich rock salt mine in Ontario. Goderich is the world's largest active salt mine and boasts unique geology with convenient access to a deep-water port. Also, Compass' operations at the Great Salt Lake in Utah produce sulfate of potash from one of only three naturally occurring brine sources, which avoids the costs incurred through chemical processing. Writes Morningstar, "Compass' cost advantages have led to solid returns on invested capital."

Kao Corp (4452 JP) is Japan's largest household and personal care company. Wide-moat rated Kao gets its moat from two sources according to Morningstar: "intangible assets resulting from its strong brand mix and entrenched retailer relationships, as well as cost advantages, primarily in its domestic market." Kao is a leader in providing food and beverage, sanitary, and oral care consumer goods primarily to Japanese consumers. The company also boasts the top disposable baby diaper brand (Merries) in Japan since 2007. Kao enjoys lower distribution costs given that delivers products through its subsidiaries and not through wholesalers, as do most other Japanese consumer products manufacturers. Morningstar also believes that Kao's competitive edge is bolstered by cost advantages it has gained from its origins as a manufacturer of soap, and writes, "Kao's direct operating margin remains above 30%, which is similar to its peers with a cost advantage, such as Unilever."

Ramsay Health Care (RHC AU) is Australia's largest private hospital operator and has been given a "narrow economic moat" rating from Morningstar due its competitive cost advantages. Ramsay operates more than 200 hospitals and day surgery facilities, and employs more than 60,000. Ramsay owns and runs the highest quality private hospitals in Australia which enables it to generate strong returns on capital. Ramsay is a cost leader with considerable pricing power, given its negotiating strength with Australia's private health insurance funds. Ramsay has branched out to the U.K. and France, successfully exporting its culture of cost control and high levels of customer service. Morningstar asserts that Ramsay offers "quality healthcare/services at the lowest cost of all private hospitals in Australia….and has historically delivered the highest industry profit margins when compared with its main competitor, Healthscope."

VanEck Vectors® Morningstar Wide Moat ETF (MOAT®) and VanEck Vectors® Morningstar International Moat ETF (MOTI®) provide access to global moat-rated companies, by seeking to replicate the Morningstar® Wide Moat Focus IndexSM and Morningstar® Global ex-US Moat Focus IndexSM, respectively. Each Index tracks the overall performance of attractively priced companies with sustainable competitive advantages in their respective markets according to Morningstar's equity research team.

MOAT holdings and learn more about moat investing

MOTI holdings and learn more about moat investing

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Asset TV Masterclass: Municipal Bonds https://www.vaneck.com/blogs/muni-nation/asset-tv-municipal-bonds/ Portfolio Manager James Colby participated in Asset TV’s recent Muni Bond Masterclass video panel, and shares his current thoughts and outlook on the muni bond market.

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VanEck Blog 8/3/2017 12:00:00 AM

James Colby, VanEck Vectors Portfolio Manager and Senior Municipal Strategist, participated in Asset TV's recent Muni Bond Masterclass video panel, hosted by Asset TV's Gillian Kemmerer. Colby joined municipal bond industry experts Terry Hults of AllianceBernstein, Suzanne Finnegan of Build America Mutual, and John Miller of Nuveen.

Jim Colby's comments are excerpted below.

GILLIAN KEMMERER: Welcome to Asset TV's Municipal Bonds Masterclass. Municipal bonds have dominated headlines in recent months with an influx of crossover buyers and pockets of credit concern impacting the fate of the sector. Investors are grappling with a legislative agenda that could make its mark on this space, but with no sense of the timeframe in which those changes may be enacted. What does the opportunity set look like right now and what do investors need to know? Today, I am joined by a panel of experts who will share their insights.

Muni Market's Evolution in the Past Decade

KEMMERER: Let's start with Jim Colby. How has the municipal market changed, either in terms of composition or opportunity set, over the past few years?

JIM COLBY: Looking back at the last 10 years, I would say that the financial crisis [2008-2010] really opened up the marketplace to new concepts and new ideas. Municipal bonds have been a tried and true performer, and a core holding in many asset models. Now we have innovation, and I'm not just talking about derivative structures. I'm talking about true innovative structures in the marketplace which are pleasantly, I think, offsetting in terms of where opportunities exist not only on the yield curve and the credit spectrum, but for different types of investors. We have a range of different types of fund structures from closed-end funds to UITs [unit investment trusts], to now ETFs [exchange traded funds], which is the part of the market I represent. I think we now have a collection of asset opportunities that lends itself not just domestically, but here's the big change, even internationally. We see interest in the municipal bond space, specifically the Build America Bonds program, which was an offshoot of the financial crisis, that has opened up a whole new venue of potential investing opportunities in Europe, in Asia, and we see that continuing.

KEMMERER: Are you saying that the opportunities in the muni bond market in terms of fund structure have really changed?

COLBY: Absolutely. I mean it's an opportunity because the disruption of the market to some degree has created a comparative value analysis, if you will. We are not just saying here is tax exempt income to the buyer. We're saying, compare what they are delivering compared to corporates. Compare what they are delivering to equities over a long period of time. And these comparisons have been very favorable to munis in the past decade.

Recent Muni Market Performance

KEMMERER: Let's look at performance specifically from Q4 of last year through the first half of 2017. We saw some interesting movements in munis in response to the election. Jim, how would you characterize the past couple of quarters of muni performance?

COLBY: Along with the election for the Republicans in November came a concern that tax reform was in play in a big way. What impact this would have on the municipal marketplace was very uncertain. I think this led to the outflows that occurred in the municipal space, through probably the mid part of December and through the end of the year. That uncertainty was in great part mitigated by the slowness that occurred in terms of Trump's administration putting forth measures that would get enacted in that timeframe that he had hoped for. So with the potential of tax reform impacting munis, I think that we returned to a more orderly municipal market in the first quarter.

KEMMERER: Interesting. It seems that munis have reacted to the slow pace of legislative growth faster than other asset classes, which might still be riding a little tail end of that wave of the election.

COLBY: I would say that's a fair analysis.

Muni Supply Demand Dynamics

KEMMERER: Jim, coming to you, how do you look at the demand supply imbalance in munis right now?

COLBY: I think it's very favorable for our marketplace, and it is a dynamic that we have been pointing out to our clients, and that we've written about, over the last three years. And the supply demand imbalance has occurred for slightly different reasons in each year. For example, in January, one of our leading strategists in the industry did predict an enormous wave of refinancing, contributing to nearly $500 billion in terms of new issuance this year. But then I had a conversation with him at the end of the first quarter, and asked him, "Well, what's happened?" He said, "No refinancing." With refunding volume down, that is a big part of the supply picture. At the same time, demand is strong; it keeps reappearing in the form of new investors looking at the marketplace and looking for "relative value opportunities". And also with the amount of roll off that's occurring – bond calls, coupon payments, bond maturities – this month, with June 30 and July 1, for example, going to be very significant dates, there is an enormous amount of cash coming back in to client accounts for reinvestment opportunity.

Muni Opportunities Based on the Yield Curve

KEMMERER: Let's discuss market technicals. How has the shape of the yield curve changed, and what are some of the best entry points?

COLBY: At VanEck, we have built portfolios that are positioned to provide client opportunity for different outcomes in the marketplace. We subscribe to two key thoughts. One concerns the intermediate part of the municipal curve which is supported not only by individual investors but by substantial institutions in this country ― they could be insurance companies, big property and casualty companies, and banks in particular. In the 7-12 year intermediate part of the curve there is a great deal of issuance and that coincides with a greater demand from those institutions. And as John was just saying, high yield has been for quite some time, on a comparable basis to corporate high yield, well above its long-term mean in terms of the nominal yield deliverable. From a technical point of view, when you do the math to represent apples to apples, taxable equivalent returns for munis versus other asset classes, are still favorable. And that's what drives both the intermediate part of the curve opportunities as well as high yield.

The GO-Revenue Bond Debate

KEMMERER: Jim, what are your thoughts on the general obligation versus revenue bond debate?

COLBY: We look at the muni universe in a slightly different fashion because our management process focuses on matching up our ETF portfolios against specific indices, and an index will reflect what's in the marketplace. And if it's, say, a 65/35 division between general obligation and revenue bonds and more granular than that of course, we're certainly trying to do two things. Number one, we're trying to reflect what the index reflects. Number two, we do care about what's happening with Detroit, with Puerto Rico, with Illinois in particular because, as we look at what might occur two weeks or two months from now, it will have a big impact upon the structure of the index. And the index doesn't pay out returns, but our portfolios do. If we are even slightly overweight in a sector in a revenue situation or a GO like the State of Illinois and it drops below investment grade status, then of course we have to adjust. We do a similar analysis to manage all our ETF portfolios, but with a bit of a wait and see approach given that we are not supposed to manage proactively.

KEMMERER: Jim, let's talk about Illinois. When you look at the possibility that Illinois might get downgraded, what's the process you go through to look at your indices and the composition or your portfolios, and re-jigger them? Will Illinois automatically go into your high yield index?

COLBY: Given the makeup of our high yield index, we carry triple B-rated securities, as a condition of meeting New York Stock Exchange requirements as well as the SEC, in terms of fulfilling the need for what is liquid or represents liquidity in high yield. Illinois is also part of our investment grade index, the bottom rung. As I mentioned, we're looking at the relative weighting in the index of Illinois GOs, of its political subdivisions. And doing our best to match up to those weightings with a hopeful eye that something positive will materialize in Springfield. Right now it is anybody's guess, and I am an outsider looking at the big picture. For two years now we have seen no legislative compromise to create any certainty around what the outcome will be.

State Pension Liability

KEMMERER: Jim, unfunded pension liability is an absolutely enormous issue in the U.S. What's your outlook? And is any state getting it right in a way that other states can model?

COLBY: That's a question for some very focused analysts. States, including Connecticut, New Jersey, Kentucky, Pennsylvania, and now Illinois, are all laboring under intense scrutiny in a way that they have not experienced in prior years. I can remember going back some 25 years or so and hearing about the unfunded pension liabilities in some of these states. At that time, it got very little focused attention because economically states were doing well in other areas. There were revenue streams that covered up some of those issues, or legislatively the executive branches had the ability to say, "Well, all right, we'll set that aside for another year, allocate the money into different resources." I do think, however, that it is a grave concern when we're growing at less than 2% CPI year over year. Yes, there's job creation, but it's not as economically productive as it might otherwise be, which translates into slower revenue growth, which means that the POPs ― the Pension Obligation Performers ― are going to struggle with a lack of ready available cash in order to do what they are supposed to do internally within their own states, as well as fund their pension requirements.

KEMMERER: Jim, what are some of the opportunities that you see right now along the yield curve?

COLBY: Unquestionably, the intermediate part of the curve has almost never ― and I know as soon as I say something like this that somebody will prove me wrong ― flattened or inverted, which means that you're getting the benefit by being positioned in that part of the curve of opportunity, what we call roll down. The maturity of bonds that are 10 years right now, next January are going to be 9-year bonds. All things being equal, that means some incremental performance opportunity accrues to that part of the curve. For high yield, I do think that there are opportunities that are generally not recognizable to the average investor embedded in the different sectors. The long-term profile of high yield, low default rates in the muni market, higher recovery rates when defaults do occur than in the corporate sector. And the high taxable equivalent returns compared to other asset classes really are what recommends munis.

KEMMERER: With munis, we have tax free income, liquidity, and security. Jim, last but not least, where do munis fit into a larger investment portfolio?

COLBY: ETFs are a product that are relatively new on the scene, nearly 10 years old probably this September. Investors should ask, what do I need to anchor stability in my portfolio? While munis, as we discussed are clearly a preferential option, the ETF structure provide a structure that is low cost and transparent. ETFs trades on the exchange so that at any time, any moment, you can go buy $100 worth of a stock instead of spending $5,000 to buy one particular municipal bond, which is the typical trading unit for these bonds.

KEMMERER: Thank you all for taking time to paint this really interesting picture of the municipal market. From the Asset TV studios in New York, I am Gillian Kemmerer, and this was the Municipal Bonds Masterclass.

Watch Video Asset TV Masterclass: Municipal Bonds

James Colby, VanEck Vectors Portfolio Manager and Senior Municipal Strategist, participated in Asset TV's recent Muni Bond Masterclass video panel, hosted by Asset TV's Gillian Kemmerer. Colby joined municipal bond industry experts Terry Hults of AllianceBernstein, Suzanne Finnegan of Build America Mutual, and John Miller of Nuveen.

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Free Lunch? Get 90 bps Yield Pickup with Emerging Markets High Yield https://www.vaneck.com/blogs/emerging-markets-bonds/free-lunch/ Compared to U.S. high yield, emerging markets high yield bonds offered a 90 bps yield pickup as of June 30, 2017.

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VanEck Blog 8/1/2017 2:57:14 PM

Higher Yield and Lower Duration

Compared to U.S. high yield bonds, emerging markets high yield bonds offered a 90 bps yield pickup as of June 30, 2017.1 The extra yield came with a lower duration (3.75 vs. 4.04) and a higher average credit quality. Approximately 60% of the emerging markets high yield index is rated BB- or higher versus less than 50% in its U.S. counterpart.

Historical yield pickup versus U.S. high yield bonds

Historical yield pickup versus U.S. high yield bonds Chart

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

A Diverse and Growing Category

The emerging markets high yield bond market has grown tremendously over the past 10 years, from $56 billion at the end of 2007 to $440 billion as of June 30, 2017.2 In addition to growing in size, diversity within the category has also increased. Investors currently gain exposure to 349 issuers in 48 different countries across the emerging markets. The quality and diversification help to explain why default rates in emerging markets corporates have been lower on average than in U.S. corporates.3 And because the bonds are denominated in U.S. dollars, investors are not taking on additional currency risk in their portfolios.

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Big Story Behind Neutral https://www.vaneck.com/blogs/allocation/big-story-behind-neutral/ The Fund’s allocations have shifted to support neutral weightings to stocks and bonds.

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VanEck Blog 7/24/2017 12:00:00 AM

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.

June Performance

VanEck NDR Managed Allocation Fund (NDRMX) returned 0.18% in June, slightly lagging the 0.26% gain for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index).1 At the same time, however, the Fund did outperform the Morningstar Tactical Allocation Category average which returned 0.0% in June.2

The largest contributor to June performance was the Fund's overweight exposure to stocks. The largest regional equity contributors to performance were an underweight exposure to the U.K. and an overweight exposure to Pacific ex Japan. The largest regional equity detractors from performance were the Fund's holdings within the U.S. and an underweight exposure to Canada. The U.S. positioning detracted given the Fund's overweight exposure to growth over value and not having exposure to small-cap equities.

Fund Positioning July 2017: Equity Exposure is Reduced

At the start of July, VanEck NDR Managed Allocation Fund's (NDRMX) asset class positioning shifted slightly. The Fund's equity allocation was reduced from 61% to 59%, the bond allocation increased from 38% to 40%, and the minimal cash position remained unchanged at 0.6%. The largest regional equity allocation shifts were an increase in exposure to Japan (3.3% to 12%) and reductions to Pacific ex Japan (4.9% to 0%) and the Emerging Markets (3.8% to 0%). Within the U.S. market cap and style positioning, the overweight exposure to large-cap growth was reduced.

Fund Positioning July 2017 Pie Charts

Source: VanEck. Data as of July 3, 2017.

June 2017 Performance Review

VanEck NDR Managed Allocation Fund's (NDRMX) asset class positioning was a significant contributor to performance in June.

As we hit the mid-year point, we remain optimistic about performance through the end of the year. As of June 30, global stocks (MSCI All Country World Index) were up 11.82%, U.S. stocks (S&P 500 Index) had gained 9.34%, and bonds (Bloomberg Barclays US Aggregate Bond Index) had risen 2.27%. The stock market continues to be faced with dueling forces. The U.S. Federal Reserve and other central banks have created headwinds, signaling their intent to wind down the scope of accommodative monetary policies. Opposing this, President Trump's goals of lowering taxes, more fiscal spending, and less regulation, have created tailwinds.

Total Returns (%) as of June 30, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
0.18 11.68
Class A: Maximum 5.75% load -5.57 6.02
60% MSCI ACWI/
40% BbgBarc US Agg.1
0.26 10.49
Morningstar Tactical Allocation
Category (average)2
0.00 8.49
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
Morningstar Tactical Allocation
Category (average)2
0.81 8.91

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: There is More to the Story of Being Neutral Stocks and Bonds

We always like to explain the benefits of indicator diversity. The price-based indicators (or technical indicators) and non-price-based indicators (or macroeconomic, fundamental, and sentiment indicators) complement each other nicely. The price-based indicator composite had been bullish all year until July when it turned neutral. The non-price-based indicator composite was last bullish in January, continuing to signal that the market may be getting ahead of itself and causing the model to reduce equity exposure throughout the year.

The small asset class shift between stocks and bonds implies that not much changed for July. However, if you only look at the changes in the Fund's positioning you may miss the larger story.

Sentiment, as measured by the NDR Daily Sentiment Composite, recently turned bullish. Sentiment is a contrarian indicator that seeks to be wary of the crowd at extremes. Warren Buffett is probably the most quoted investor of all time, and for very good reason. Mr. Buffett once said that investors should be “fearful when others are greedy and greedy when others are fearful.” That is exactly what this indicator is trying to achieve. It is comprised of nearly 20 unique measures of investor sentiment. These include various inputs such as investor surveys, asset flows, implied volatility, and trading volume. This indicator turned bearish in May when investors were overly optimistic and became bullish in June when investors became overly pessimistic.

The dotted lines demonstrate the extremes. The NDR Daily Sentiment Composite changes its reading when sentiment reaches an extreme and then reverses.

NDR Daily Sentiment Composite

NDR Daily Trading Sentiment Composite Charts

Source: Ned Davis Research. Data as of June 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.

The bullish sentiment reading was, however, offset by a global breadth indicator turning bearish. Breadth is a technical indicator that helps us to understand the health of a trend in the market. It measures how many constituents, within an index, are participating in a trend. The breadth indicator that we are focusing on measures the percentage of countries in the MSCI All Country World Index that are trading either at or below their 50-day moving average. In the chart below, we can see that at the end of June more than 50% of the countries were trading below their 50-day moving average. When this happens we typically experience weak global equity markets.

NDR Breadth Composite

NDR Breadth Composite Chart

Source: Ned Davis Research. Data as of June 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.

This is the first time all year that we have had agreement among the stock/bond indicator composites. Both the price-based and non-price-based indicator composites are now at neutral readings. Therefore, there is much more to the story than just being neutral stocks and bonds for the past two months.

Additional Resources

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Early Cycle Pause Motivated by Skepticism, Not Data https://www.vaneck.com/blogs/natural-resources/early-cycle-pause-by-skepticism/ In 2Q, the most significant impact on the natural resources market and our strategy came from lower crude oil prices, which ground down through the quarter. 

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VanEck Blog 7/20/2017 12:00:00 AM

2Q 2017 Hard Assets Equities Strategy Review

During the quarter, VanEck's hard assets strategy returned -13.35% (measured by VanEck Global Hard Assets Fund, Class A (GHAAX), excluding sales charge). On a relative basis, the strategy underperformed its commodity equities-based benchmark index, the Standard & Poor's® (S&P) North American Natural Resources Sector Index (SPGINRTR),1 which returned -7.09% over the same period.

Market Review

The most significant impact on the natural resources market and the strategy came from lower crude oil prices, which ground down through the quarter. In addition to these low prices, we believe that continuing dysfunction in Washington, DC had a significant impact on the market. Although 2016 drew to a close with the deflation/inflation "conversation" having shifted to include the prospect of forthcoming inflation, the general feeling of optimism with regard to both inflation expectations and infrastructure spending faded rapidly by mid-year.

Fundamental: Demand for most commodities has remained resilient. The long talked about cuts in capex continue to weigh on supply growth. Even in the U.S., despite a sharp increase in crude oil supply since the beginning of the year, the most recent data points indicate a drop in the rate of new U.S. rigs and at least some signs of lower oil production. This could be a very early response to weak oil prices. In addition, we are now seeing strategic asset allocation decisions being made by companies, whether through acquisitions and/or dividends.

Technical: In terms of relative performance, although energy may have had its worst ever first half, we still consider this to have been an early-cycle pause in the commodities rebound, which began in early 2016.

Macroeconomic: We see various supportive data points that suggest there is at least some synchronization in global growth. The latest Euro Purchasing Managers' Index2 (PMI) predict solid second quarter GDP expansion (see chart below), and China's economy still appears to be improving. Given these factors, as well as continued resilient demand for most commodities, we believe we are well positioned as we emerge from this stage of the rebound.

Manufacturing Purchasing Managers' Index (PMI) Values

Manufacturing Purchasing Managers' Index (PMI) Values Chart

Source: Bloomberg. Data as of June 30, 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Natural Resources Sub-Sector Review

Energy: We believe that OPEC's (Organization of Petroleum Exporting Countries) November meeting, and subsequent May agreement to extend quotas, can be described as "historic". The outcome has, though, been somewhat disappointing up to this point. However, we still think that the production quota system and long-term supply constraints from non-shale, non-OPEC producers, in conjunction with continued resilient demand growth, will bring the market back into balance.

Metals and Mining: Corporate restructuring in the global mining sector, we believe, has been successful. We are now starting to see real results from optimized operations, especially in terms of productivity. Broadly speaking, balance sheets are where companies said they would get them. Returns have improved and cash flows are definitely increasing. We believe that mining companies, including gold miners, have found a new foundation from which they can start to generate growth again (this time, hopefully, more prudently) and create sustainable shareholder value.

Agriculture: While healthy South American crops of both soy and corn limited any upward movement in prices, this was positive for proteins. The nitrogen fertilizers market benefited from the fact that, contrary to expectations, corn acreages increased at the expense of soy.

Top Quarterly Contributors/Detractors

Top Quarterly Contributors/Detractors Chart 2Q 2017

Source: FactSet; VanEck. Data as of June 30, 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 in the Early Stages of Recovery

We continue to believe that we are still in the very early stages of coming out of a downturn that was characterized by considerable oversupply. It is, therefore, going to take a while to rebalance. In the oil market, we remain surprised by the skepticism that currently exists in the face of data that could not, we believe, be more compelling.

Even if one is of the opinion that U.S. shale oil is going to oversupply the market, this still implies that there are a number of E&P companies that are going to grow at very fast rates for a couple of years. We believe those will remain very good investments.

Perhaps what the industry is not communicating is that it has evolved. For example, now, from a multi-year, strategic standpoint, and in contrast with traditional oil exploration companies, U.S. shale oil companies can actually "throttle" production on and off and really focus on returns.

One of the main pillars of our investment philosophy continues to be to look for long-term growth. Since we remain convinced that positioning for the future and not just reacting to current circumstances is of paramount importance, our focus remains on companies that can navigate commodity price volatility and help grow sustainable net asset value.

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June Gains Extend Moats’ YTD Strength https://www.vaneck.com/blogs/moat-investing/june-gains-extend-moats-ytd-strength/ U.S. moat stocks were the shining stars in June, but international moats can’t be overlooked as both markets have posted strong relative performance through the first half of the year.

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VanEck Blog 7/20/2017 12:00:00 AM

For the Month Ending June 30, 2017

Performance Overview

June was a strong month for moat investors. Both moat-focused indices outperformed their respective broad market indices, and finished the first half of the year ahead by more than 4 percentage points. The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") posted strong relative returns versus the S&P 500® Index in June (2.87% vs. 0.62%) extending its outperformance for the year-to-date period (13.86% versus 9.34%). International moat stocks, as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), modestly ouperformed the MSCI All Country World Index ex USA in June (0.35% versus 0.31%) and maintained its performance advantage for year-to-date period (18.48% vs. 14.10%).

U.S. Domestic Moats: Value Realized in Healthcare

A diverse set of companies contributed to the U.S. Moat Index's impressive month. As the largest sector in the U.S. Moat Index, healthcare was the top contributor. Led by Amgen, Inc. (AMGN US, +10.94%) and Gilead Sciences, Inc. (GILD US, +9.95%) the sector had strong performers from various sub-industries and all 16 constituents from the sector posted positive returns in June. State Street Corporation (STT US, +10.62%) was the standout from the financial sector as banks benefited from positive stress test results. Recreational vehicle producer Polaris Industries, Inc. (PII US, +10.32%) also boosted U.S. Moat Index returns in June. By contrast, several U.S. Moat Index constituents struggled during the month. Industrials companies Stericycle, Inc. (SRCL US, -6.67%), General Electric Co. (GE US, -6.22%), and C.H. Robinson Worldwide, Inc. (CHRW US, -2.03%) all detracted from performance. Starbucks (SBUX US, -8.33%) was the worst performing constituent in June as investors soured on the company.

International Moats: Positives and Negatives Come to Stalemate

ENN Energy Holdings Ltd. (2688 HK, +17.03%) was the standout constituent in the International Moat Index. The privately owned natural gas distribution company recovered following a May sell-off that Morningstar analysts believed was overdone following speculation of a potential China government imposed annual cap on natural gas distributor growth rates. Although ENN Energy Holdings Ltd. and China Resources Gas Group Ltd. (1193 HK, +9.81%) were the only two utilities firms in the International Moat Index, the sector was the top contributor to returns in a relatively flat month. Financials also performed well, but weak performance from consumer discretionary and telecommunication services companies kept the Index's total returns in check. Moat companies from Mexico posted impressive returns but their small weighting in the Index wasn't enough to overcome negative returns broadly from India, France, and China.

 

(%) Month Ending 6/30/17

Domestic Equity Markets

International Equity Markets

(%) As of 6/30/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 6/30/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
Amgen Inc. AMGN US 10.94
State Street Corporation STT US 10.62
Polaris Industries Inc. PII US 10.32
Gilead Sciences, Inc. GILD US 9.95
Biogen Inc. BIIB US 9.52

Bottom 5 Index Performers
Constituent Ticker Total Return
salesforce.com, inc. CRM US -3.39
General Electric Company GE US -6.22
Stericycle, Inc. SRCL US -6.67
Mondelez International, Inc. Class A MDLZ US -6.90
Starbucks Corporation SBUX US -8.33

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 17.03
Cemex SAB de CV Cert Part Ord Repr 2 ShsA & 1 ShsB CEMEXCPO MM 14.24
IOOF Holdings Ltd IFL AU 11.57
Ramsay Health Care Limited RHC AU 10.02
CSL Limited CSL AU 10.00

Bottom 5 Index Performers
Constituent Ticker Total Return
SFR Group SA NUM FP -6.57
Orange SA ORA FP -7.53
Genting Singapore Plc GENS SP -7.61
Tata Motors Limited TTMT IN -9.34
Baytex Energy Corp. BTE CN -16.64

View MOTI's current constituents

As of 6/16/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
L Brands Inc LB US
T Rowe Price Group Inc TROW US
CH Robinson Worldwide Inc CHRW US
General Electric Co GE US
BlackRock Inc BLK US
John Wiley & Sons Inc. A JW/A US

Index Deletions
Deleted Constituent Ticker
Mead Johnson Nutrition Co MJN US
Jones Lang Lasalle Inc JLL US
CBRE Group Inc. CBG US
Mastercard Inc A MA US
Varian Medical Systems Inc VAR US
Cerner Corp CERN 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
Roche Hldgs AG Ptg Genus Switzerland
Telefonica SA Spain
Bayer Motoren Werke AG (BMW) Germany
Potash Corp of Saskatchewan Canada
China Resources Gas Group Ltd. China
Canadian Imperial Bank of Commerce Canada
Westpac Banking Corp Australia
SFR Group France
Mobile TeleSystems PJSC Russian Federation
Wipro Ltd India
Koninklijke Philips Electronics NV Netherlands
Meggitt United Kingdom
Novartis AG Reg Switzerland
America Movil SAB de CV L Mexico
Murata Manufacturing Co Ltd Japan
DBS Group Holdings Singapore
HeidelbergCement AG Germany
Commonwealth Bank Australia Australia
National Bank of Canada Canada
Ansell Ltd Australia
Julius Baer Group Switzerland

Index Deletions
Deleted Constituent Country
Kao Corp Japan
Seven & I Holdings Co Ltd Japan
William Demant Hldg Denmark
Telstra Corp Ltd Australia
Carsales.com Ltd Australia
DuluxGroup Ltd Australia
Fisher & Paykel Healthcare Corporation Limited New Zealand
Swire Properties Ltd Hong Kong
Infosys Ltd India
Tata Consultancy Services Ltd India
Ramsay Health Care Ltd Australia
Airbus SE France
Singapore Exchange Ltd Singapore
GEA Group AG Germany
London Stock Exchange Plc United Kingdom
Vicinity Centres Australia
China Mobile Ltd. China
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Iluka Resources Ltd Australia
KDDI Corp Japan

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



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Growth Expectations Driving Emerging Markets https://www.vaneck.com/blogs/emerging-markets-equity/higher-growth-expectations/ Emerging markets equities continued their positive momentum and achieved a gain of 18.27% for the first half of 2017.

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VanEck Blog 7/18/2017 12:00:00 AM

Emerging Markets Equities Post Notable Gains in 1H2017

After a very creditable first quarter, emerging markets equities ― as represented by the benchmark MSCI Emerging Markets Investable Markets Index (MSCI EM IMI)1 ― consolidated and built upon that period to achieve a gain of 18.27% for the first half of 2017. For the asset class as a whole, stronger performance can be traced to both the dissipation of a number of potentially negative factors and a solid underpinning of better earnings growth and significantly better free cash flow generation.

We have witnessed a radical shift away from the outperformance of cyclicals which was so marked in 2016. To date, the 2016 winners and losers by country and sector have been turned on their heads. In particular many large, cyclical, often commodity-based companies, having experienced a banner year in 2016, have performed poorly thus far in 2017 ― as they had done for a number of years prior to 2016. We maintain a disciplined focus on structural growth, largely eschewing cyclicality. This focus has clearly served our emerging markets equity investment strategy well in 2017.

Growth Continued to Outpace Value

Growth stocks continued to outperform value stocks in the second quarter of 2017, while small caps continued to lag large caps extending their underperformance "spell" to 18 months. Information technology sector led by the benchmark's top holdings performed best during the quarter followed by consumer related stocks. The energy, utilities, and materials sectors all registered negative returns. On a country level, stocks in Turkey, Hungary, and Poland performed well while stocks in Russia and Brazil did not, mainly driven by macroeconomic and political factors.

Positive Outlook Progresses in 2017, Replacing Yearend 2016 Negativity

At the start of the year, the possibility of U.S. dollar strength, unanticipated rate increases, China issues, and protectionism were all cited as significant reasons for antipathy towards emerging markets equities. In each case, the negative scenario failed to develop. The U.S. dollar actually weakened. This tends to be positive for emerging markets as long as the decline is not rapid. Short-term interest rates increased in the United States. This was well anticipated and, in our view, not something to be feared as it tends to evidence better economic growth in developed markets. Traditionally, this has had a positive impact on emerging markets. China exhibited stronger than expected growth in the first quarter and again was well able to control the potential negative implications of imbalances in its economy. We do expect economic growth in China to be weaker for the rest of the year, but to remain resilient. The worst fears of protectionist measures emanating from the U.S.'s new Trump administration proved to be misguided. For whatever combination of reasons, wholesale tariffs as described in the stump speeches appear unlikely to be implemented.

On the positive side for the asset class, earnings expectations, which held up well at the end of 2016 (in stark contrast to the previous four years), have been positive in 2017. We believe that there continues to be an underappreciated and significant increase in free cash flow among emerging markets corporates. Stronger revenues allied to less capex spend means that, in contrast to prior years, many companies have significant "free cash".

EM Rally has Firm Underpinning of Earnings and Cash Flow

Balance sheets for listed emerging markets companies are already significantly stronger than their developed markets counterparts. This begs the question about the use of this excess cash. Whether capital investment activities pick up again, corporate M&A becomes more popular, or capital is returned to shareholders, most uses of cash should be positive for equity markets. There is significantly more pressure on corporates to avoid adding further cash to their balance sheets since it depresses their return on equity.

While fears have dissipated, we think that this firm underpinning of earnings and cash flow is what gives the emerging markets rally some "legs".

2Q'17 Emerging Markets Equity Strategy Review and Positioning

The strong performance of growth stocks in Q2 worked well for the emerging markets equity strategy's relative performance, while the weakness in small-caps hurt. On a sector level, exposures to consumer discretionary and financials sectors helped the strategy's relative performance vis-à-vis the benchmark, whereas underexposure to utilities and an overweight position in the healthcare sector detracted. On a country level, China was the largest contributor to the strategy's relative performance. China's solid contribution is complemented by positive contributions from countries such as Brazil and Russia; Taiwan and Greece detracted from performance.

Top Strategy Performers/Detractors in Q2

The best performing stocks for the quarter were quite an eclectic group. Our top performing stocks were dominated by four companies from China (including Hong Kong). The other company came from South Korea. Samsung Electronics Co., Ltd., based in South Korea, manufactures a wide range of consumer electronics, information technology, and mobile communication products. Its semiconductor business manufactures a wide range of memory chips. Supply in that industry is becoming more concentrated, while the uses are becoming more broad-based, significantly reducing cyclicality. The company benefited from significant earnings upgrades, with expectations for 2017 earnings increasing by over 25% over the first six months of the year.

Two of the Chinese investments are involved in the Internet sector. Tencent Holdings Ltd and Alibaba Group Holding Ltd. both reported strong operations, maintained very visible growth (despite their scale) and continued to offer exciting earnings growth prospects as their quasi-monopolistic positions broadened and deepened.

The biggest detractors from the strategy's performance during the period were from around the globe. Russia's dominant bank, Sberbank of Russia OJSC, suffered from a correction in the Russian market driven potentially by a drop in crude oil prices. The performance of Syngene International Limited, a small, but fast growing pharmaceutical company in India, suffered from a fire at its facility in December. Strides Shasun, an Indian pharmaceutical company, also had a difficult quarter due to disappointing results.

Strong Earnings Support Positive Outlook for Second Half of 2017

Looking at the asset class as a whole, the macroeconomic vulnerability of emerging markets is currently at very low levels compared to what it has been in the past and certainly compared to even just the "Taper Tantrum" in 2013. Nearly every country is in better shape, whether in terms of current account deficits, fiscal deficits, and short-term debt versus total external debt, or PMIs.

On the microeconomic or corporate level, we have over the last year seen better earnings results. For 12 consecutive months emerging markets corporate earnings have been upgraded (see chart below). We have seen this happen a handful of times in the last 20 years or so. And each time it has been positive for the market. However these upgrades have not related just to commodities, they have been broad based.

In addition, and importantly, operating cash flow is strong and increasing, and capex is declining, which is leading to not only increasing but also historically high free cash flow. Since there is low leverage in emerging markets, this ought to result in more cash being available for companies to pay out to shareholders either by way of dividends or through share buybacks.

MSCI EM Index: % Change in Price and EPS Growth (Quarter over Quarter)
June 2007 - June 2017

MSCI EM Index: % Change in Price and EPS Growth (Quarter over Quarter) Chart

Source: Bloomberg. Past performance is not indicative of future results.

China

Looking at individual countries, while China's economy may have had a good first quarter in macro terms, our expectations for the rest of 2017 are that the economy will be slightly weaker. We do not believe, however, that there is anything to worry about. There has been some prudential tightening in an attempt to try to clean up some of the balance sheet issues that exist. But these affect only certain aspects of China's economy.

India

In India, while reforms may be progressing, the concern is that there is still a reasonably large bad debt issue in the banking sector which is not evenly recognized among India's banks. We believe there has to be some recapitalization among banks, and probably some mergers and acquisitions. But, ab initio, everything needs to be done on a level basis. The Central Bank of India is enforcing normalization of bad debt recognition and some issues may arise in this respect. However, once banks have been recapitalized, then both a credit and capex cycle can be started. Each has been noticeably absent.

Mexico

Mexico bounced back very strongly in the first quarter following concerns in the last quarter of 2016. We believe Mexico's economy is, effectively, normalizing. Although there are challenges going forward, the economy seems to be on reasonably firm footing.

Brazil

In Brazil, as the economics continue to be challenging and the tentacles of corruption spread further, the prospects for reform appear to recede. However, what the strategy is exposed to in Brazil is not too economically sensitive.

South Africa

Confidence in South Africa remains depressed because of political uncertainty and an administration that appears not to be business friendly. We believe, however, that corporate management in the country continues to be among the best in the emerging markets. We can still find companies that, while based in South Africa, derive a significant portion of their revenues and/or earnings overseas, thereby providing something of a hedge for rand weakness.

Download Commentary PDF with Fund specific information and performance.
For a complete listing of the holdings in VanEck Emerging Markets Fund (GBFAX) as of 6/30/17, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

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Spin-Off in the Spotlight: New Media Investment Group (NEWM) https://www.vaneck.com/blogs/etfs/spin-off-new-media-investment-group-newm/ New Media was spun off from parent company Newcastle in 2014, and since then its growth has been fueled by an aggressive acquisition of local newspapers.

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VanEck Blog 7/14/2017 12:00:00 AM

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

Spin-Off Company: New Media Investment Group Inc. (NYSE: NEWM)

Parent Company: Newcastle Investment Corp. (NYSE: NCT)

Spin-Off Date: February 5, 2014

GSPIN Index Inclusion Date: October 1, 2014

New Media Investment Group Inc. (New Media) was added to the Horizon Kinetics Global Spin-Off Index (GSPIN Index) in February 2014. New Media was spun off from parent company Newcastle Investment Corp. (Newcastle), a commercial mortgage and senior housing REIT. Newcastle's goal was to segregate its media assets, which at the time comprised the Dow Jones Local Media Group assets acquired from News Corp. in 2013, as well as GateHouse Media assets.

One of the Largest Publishers of Local U.S. Newspapers

Since 2014, New Media has grown to become one of the largest publishers of local media content in the U.S. It boasts a portfolio of more than 630 publications, 555 websites, and six Yellow Pages directories. The company operates in more than 555 markets across 36 U.S. states, and its content reaches more than 19 million people. Each of New Media's 130 daily newspapers has been published for over 50 years.

Much of New Media's growth has come from the company's aggressive acquisition of local newspapers. In 2016, for example, New Media made eight newspaper acquisitions at an aggregate cost of $123 million. Given its more than $200 million of net operating losses, New Media's buying spree makes sense as a shield against taxes in the next several years.

Adapting to New Digital Trends in Publishing

New digital technologies have altered the way news is offered and have dramatically changed consumer preferences. Not surprisingly, New Media's digital properties and a handful of select publications are growing, while its traditional print publications are generally in decline – a trend consistent across the publishing industry. On balance, approximately 52% of New Media's sources of revenue are expanding or stable, while 48% are in decline. If this positive ratio continues, the company could be perceived as growing on an all-inclusive basis, rather than as a company in decline.

New Media has a sensibly arranged balance sheet, with $733 million of equity (all of it tangible), and a total of $343 million of long and short term debt, against cash balances of approximately $136 million. The company's annual free cash flow is expected to be between $150 million and $160 million in 2017. Currently, New Media's shares trade at 4.6x estimated free cash flow. Most of the cash flow is paid out as dividends, and the company's stock currently yields 10.48%. Looking ahead, if New Media builds a reputation as a stable dividend payer, rather than as a company in decline, its required yield payout could decrease to the 4% level, and this would then have the potential to boost the company's share price substantially.

View Current SPUN Fund Holdings

View Current GSPIN Index Holdings

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Solid Support for Gold in Second Half https://www.vaneck.com/blogs/gold-and-precious-metals/solid-support-in-second-half/ Gold continued its range-bound pattern in June, fluctuating between $1,200 and $1,300 per ounce since January, while unusual selling pressure characterized trading activity. 

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

Gold Reacts to Fed Hawks in June

Gold continued its range-bound trading pattern, fluctuating between $1,200 and $1,300 per ounce since January. In June the price fell $27.39 (-2.16%) to end the month at $1,241.55. On June 14, the Fed raised rates for the fourth time in this rate hiking cycle. A common pattern emerged for the first three rate hikes with gold price weakness ahead of the hikes, followed by a rally to higher prices immediately after each hike. This pattern then changed, as gold reached its high for the year ($1,298 per ounce) on June 7 before the hike and subsequently trended lower for the rest of the month. Gold came under pressure as hawkish statements by the Fed following the Federal Open Market Committee (FOMC) meeting raised the odds of a fifth rate increase later in 2017.

The U.S. dollar gained strength temporarily following the FOMC meeting, but ended June with a 1.4% loss, as measured by the U.S. Dollar Index (DXY),1 which fell to nine month lows. The weakness was caused by comments from top officials from the European Central Bank (ECB) and Bank of England (BOE), which the markets interpreted as suggesting that some removal of monetary accommodation could be warranted soon. Also weighing on the U.S. dollar was the International Monetary Fund (IMF) downgrade of its 2018 U.S. GDP growth forecast to 2.1% from 2.5%. The global economy appears to be set to outpace the U.S. economy over the coming year.

Gold Hurt by Intense Selling Pressure, and Possible Manipulation

The June performance of gold was disappointing given the weakness in the U.S. dollar. Gold normally has an inverse correlation2 with the dollar. However gold came under intense selling pressure that looks suspiciously like someone was set on manipulating the market lower. On June 26 before European markets opened at 4:00 a.m. U.S. Eastern Time, the futures market was hit with a 1.8 million ounce sell order that drove the price down $18 in an instant. The selling came during off hours when liquidity was light and it pushed the price below the technically important $1,250 per ounce level.

Further selling pressure on the day before the Fourth of July holiday in the U.S. had gold looking to test the $1,200 level. We have not seen this type of (presumably) manipulated selling pressure since the bear market period from 2013 to 2015. We assume this activity originates with banks or hedge funds attempting to generate a profit, or with a government attempting to dampen competition with the U.S. dollar. We will never know the source, or whether it is part of a broader conspiracy, so we do not waste further time considering the possibilities. In the longer term, the market is too broad and deep to be manipulated successfully.

Mixed Results for Gold Equities

Gold stocks were mixed in June. The NYSE Arca Gold Miners Index (GDMNTR)3 followed gold lower with a loss of 2.87%, whereas the MVISGlobal Junior Gold Miners Index (MVGDXJTR)4 posted a gain of 5.59%. The junior miners are showing some mean reversion after being oversold ahead of a major Index rebalance that occurred on June 16.

Waiting for a Strong Catalyst to Propel Gold off its Base

Since the bear market ended in December 2015, the price of gold and gold shares has been forming a base. We have yet to see a strong catalyst, however. Thus far in 2017, U.S. dollar weakness and a general nervousness on many geopolitical fronts have provided solid support for gold as a currency alternative and hedge against risks. Gold ended the first half with a modest gain of 7.75%. Gold stock indices underperformed gold as GDMNTR gained 5.29% and MVGDXJTR rose 3.47%. We normally expect gold stocks to outperform gold in a rising market. The underperformance of the indices this year is likely due to:

  1. Mean reversion after stellar outperformance in 2016;
  2. Heavy net redemptions in the gold mining ETFs;
  3. Inability of stock indices to engage in fundamental stock selection.

The Case for an Active Management Approach

A look at our actively managed VanEck® International Investors Gold Fund (INIVX) tells a different story, with a first half gain of 10.21% (class A shares, excluding sales charge) that outperformed gold by 2.46% and the GDMNTR by 4.92%.

A recent Wall Street Journal article highlighted a report from Standard & Poor's. The report indicated that two thirds of active managers of large capitalization U.S. stocks underperformed the S&P 500® Index5 in 2016, while over 85% of small cap managers underperformed the S&P SmallCap 600® Index.6 Longer term looks even worse. Over a 15-year period, 89% to 90% of active fund managers underperform their benchmark indices, including international and emerging markets funds. Little wonder that Advisor Perspectives reports that since 2007, assets in indexing or passive investing have risen from approximately 7% to 9% to almost 40% of total managed assets.

However we believe when it comes to gold equities, and possibly other sector funds, avoiding actively managed funds appears to have been a mistake. The outperformance shown by VanEck International Investors Gold Fund in 2017 is not an anomaly. Since the May 2006 inception of VanEck Vectors® Gold Miners ETF (GDX®),7 VanEck International Investors Gold Fund has outperformed the GDMNTR, the benchmark Index of both funds, by 5.5% annually. While our active gold fund may have higher expenses than a typical ETF, it more than makes up for it in performance. We do this by intensive research and careful stock selection. We maintain extensive financial models on our investment universe, constantly follow developments and meet with managements, and travel the world in search of opportunities. We cover our sector with an intensity that few generalist fund managers can muster with such a broad mandate.

Support Exists for Current Price Levels

The market is now in the midst of the summer doldrums, a time when physical demand is at its lowest, trading volumes can be light, and, as we saw in late June and early July, the bears come out to play. The gold price is testing the $1,200 per ounce level for the third time this year. If $1,200 fails, then it will go on to test the $1,175 base of the uptrend that has developed over the past 18 months. Successfully holding above these price levels would be very positive technically and psychologically for the market. Fundamentally, we believe the market is well supported around current levels because:

  1. Physical demand in India and China continues to improve, even though the People's Bank of China (PBOC) has yet to buy gold in 2017. We believe the PBOC is on pause this year due to foreign exchange and debt issues in China;
  2. Geopolitics in the Middle East and Korea—along with uncertainty surrounding the U.S. political climate and policy—has created a pervasive nervousness globally that benefits gold;
  3. The U.S. dollar appears to be in decline. While it did not help gold in June, we expect the historically negative correlation to benefit gold in the longer term;
  4. Positioning in the futures market suggests there could be more buying ahead.

To Gold's Benefit, This Fed Rate Hiking Cycle is Likely to End in Tears

We continue to be positive on the gold price in the longer term. Based on what we see and hear every day, all of us can imagine possible black swan8 events that might propel gold much higher. When we look at the economic cycle in the U.S., we find a more compelling investment case. Our March commentary highlighted many signs of a late cycle economy. In our May commentary, we published an ominous looking chart of NYSE margin debt. Complacency is at high levels typically seen at market tops. Investors continue to pour money into ETFs, driving stock market indices to new highs, while volatility as measured by the VIX Index9 is at historic lows. Most Fed rate hiking cycles end in tears. Will this one be any different?

Gold Remains a Solid Money Alternative Given Financial Risks

Gold would likely benefit from dollar weakness if the Fed is unable to raise rates later this year. In the longer term, when the economy and markets eventually see a downturn, the risks to the financial system will probably be substantial. Historically, excessive leverage is the core cause of financial upheaval. Student loans, automotive loans, and credit card debt are each over $1 trillion now. The "elephant in the debt room" remains sovereign debt levels that exploded higher after the last financial crisis and has been growing ever since. A shrinking economy magnifies debt problems and, with interest rates still far below normal, would likely see the Fed again resort to quantitative easing and maybe more extreme intervention, such as debt monetization. Gold as a sound money alternative can act as a hedge against such risks.

Download Commentary PDF with Fund specific information and performance

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Brazil’s Promising Diagnostic Lab Market https://www.vaneck.com/blogs/emerging-markets-equity/brazil-diagnostic-lab-market/ Positive prospects for the diagnostic lab market in Brazil are being supported by the powerful drivers of an aging population, Brazil’s potential economic recovery, and healthcare industry consolidation.

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VanEck Blog 7/5/2017 12:00:00 AM

VanEck's Emerging Markets Equity strategy seeks to identify persistent long-term structural growth opportunities. Structural growth can be stock-specific or thematic, and can be driven by a sustainable advantage, which is often company management. Through this bottom-up process, we have identified Fleury S.A. as a potential opportunity, and a prime representative of Brazil's diagnostic lab market as described below (as of May 31, 2017, Fleury represented 1.17% of VanEck Emerging Markets Fund's net assets; see full list here). This is not a recommendation to buy or to sell any security; Fund securities and holdings may vary.

The diagnostic lab market in Brazil is growing. The sector's expansion will benefit from both aging demographic trends and the country's potential economic recovery. We believe that continued consolidation in Brazil's fragmented healthcare industry is likely to create opportunities for the largest players.

Brazilian Healthcare Industry Expands via Mandated Access

The healthcare industry in Brazil has grown significantly in the past few decades. Underpinning this growth has been the Brazilian Constitution of 1988, which mandates that the state offers the entire population universal and free access to healthcare services through the country's public Unified Healthcare System (SUS).

However, since the SUS has been unable to reach Brazil's entire population of 192 million, private health plans have become increasingly popular. According to the Agência Nacional de Saúde Suplementar (ANS), a national regulatory agency linked to the Brazil’s Ministry of Health, 41.9 million Brazilians had subscribed to private health plans by September 2009 (22% of the population at the time), and today that level has reached 25%.

In 2008, healthcare expenditure in Brazil amounted to BRL 249B, with 43% representing public expenditure and 57% private expenditure. In the early 2000s, the three primary drivers stimulating growth in the healthcare sector were income growth, formal employment, and an aging population. Between 2002 and 2008, the Brazilian economy saw real income and formal employment grow at compound annual growth rates (CAGR) of 4.0% and 5.3%, respectively.

In 2015, however, the Brazilian economy deteriorated, slowing growth in the labor market. This negatively impacted the growth of health plans as Brazilians simply had less disposable income to pay for health services. Although industry conditions have been difficult in recent years, both the current prospects for an economic recovery in Brazil in 2017-2018 and the aging demographic data remain positive.

Attractive and Resilient Growth in the Brazilian Diagnostic Lab Market

The Brazilian diagnostic lab market has grown significantly since 2000 and has proven to be resilient, even through the country's recent economic weakness. Private expenditure increased from BRL 20B in 2014 to BRL 25B in 2015, despite a GDP drop of 3.3% over the same period. While the consolidation process among the country's clinical laboratories started in 2000 and has intensified over the last few years, the market continues to be fragmented with more than 22,000 labs spread across Brazil. Currently, the top four market participants — Diagnósticos da América S.A. (DASA), Fleury S.A., Centro de Imagem Diagnósticos S.A. (Alliar), and Instituto Hermes Pardini S.A. (Hermes Pardini) — account for only 25% of private sector revenues. We believe there are strong opportunities for the largest players to continue to consolidate and to increase their market share.

Market Share of Brazil's Top Diagnostic Companies
As of 3/31/2017

Market Share of Brazil's Top Diagnostic Companies Chart

Source: BofA Merrill Lynch Global Research and companies. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Data as of March 2017.

According to Banco Bradesco, in 2015 the Brazilian diagnostics services market reached BRL 48B (approximately US$14.5B) in size, or approximately 0.8% of GDP, and represents approximately 10.5% of the country's total healthcare spending. Within this market, the insurance-paid segment is the fastest growing. Estimates are that the insurance-paid segment grew at a CAGR of 15.9% between 2011 and 2015, to reach BRL 25B in 2015. Estimated growth for this segment is expected to be approximately 7% -10% annually over the next 10 years. According to ANS, diagnostics represented approximately 21.2% of total insurance spending in 2015. The diagnostic and insurance markets are closely linked and affect each other's growth prospects, which are expected to be healthy over the next few years.

The Growth of Brazil's Insurance Paid Market (BRL B)
2011-2015

The Growth of Brazil's Insurance Paid Market Chart

Source: Bradesco BBI and companies. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Data as of December 2015.

Long-Term Sector Growth Drivers

One of the main drivers of growth for the diagnostic lab market will continue to be Brazil's aging population. The country's population is set to face a significant demographic shift as those aged 45 and older are predicted to represent 52% of the total by 2050, versus 33% in 2020.

Brazil's Aging Population
1960 – 2050e

Brazil Aging Population Chart

Source: Itau BBA and companies. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Data as of 2017.

This elderly demographic is expected not only to consume commensurately more healthcare services, including diagnostics, but also to help underpin sustainable growth for at least the next two decades.

The Elderly Spend as Much as 9 Times More on Healthcare than the Young (100 basis)

The Elderly Spend 4-9.7 Times More on Healthcare than the Young Chart

Source: BofA Merrill Lynch Global Research, IBGE, and ANS. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Data as of April 2017.

The increase in the level of penetration of private insurance will also continue to be an important driver. From 2006 to 2016, the penetration of private insurance throughout Brazil's total population increased from 19.9% to 23.2%. The implication is that, with more individuals insured, the use of diagnostic services also increases. While the economic recession in 2015 caused a slight decline in the number of insured people, the numbers are expected to rise again in 2017-2018 after the economy improves.

The adoption of new technology will also stimulate the diagnostic market. In healthcare, innovations do not simply replace existing treatments, but rather enhance the selection of products and services available to consumers. Finally, recent regulation, such as ANS' call for higher levels of service for health insurance companies, may also boost the demand for quality service.

Positive Diagnostic Lab Industry Dynamics

We believe the dynamics of the diagnostic lab industry in Brazil are very positive. The diagnostic market is a growing segment of Brazil's healthcare industry, with demographic trends favoring sector growth in the future. The fragmented nature of the industry also creates big opportunities for the largest players to continue to consolidate. We believe that the country's economic recovery and an increase in disposable income will lead to heightened awareness and better education about healthcare issues. This may result in higher demand for diagnostic lab services. These factors, together with the fact that the diagnostic testing market in Brazil is still developing, should allow for clear growth, and exciting investment opportunities ahead.

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Intangible Assets are the Leading Source of Moats https://www.vaneck.com/blogs/moat-investing/intangible-assets-source-of-moats/ Intangible assets, although not easy to quantify, are one of the primary sources of strong competitive advantages for businesses and are the leading source of economic moats.

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

"How Moats Translate into Sustainable Competitive Advantages" is a five-part moat investing education series that explores the primary sources of economic moats. The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. According to Morningstar Equity Research, there are five key attributes that can give companies economic moats, and which are viewed as sources of sustainable competitive advantages: 1) Network Effect; 2) Intangible Assets; 3) Cost Advantage; 4) Switching Costs; and 5) Efficient Scale. Here we explore the concept of "Intangible Assets."

Intangible Assets Help Build Strong, Identifiable Advantages

Although not always easy to quantify, intangible assets are one of the primary sources of strong competitive advantages for businesses and a key source of economic moats. Intangible assets can include corporate intellectual property, such as patents, trademarks, copyrights, government licenses, and business methodologies. Intangible assets help companies to safeguard key competitive advantages. Companies can use patents, for instance, to protect inventions from unauthorized commercial usage by competitors. Like patents, government licenses also raise the entry hurdles for new competitors.

A company's reputation, often measured by goodwill and brand recognition, is also considered an intangible asset. Brand identities play a key role in helping companies to stay ahead of competitors, and simply put, a positive brand promotes sales, builds trust, and inspires customer loyalty.

According to Morningstar equity research, nearly 60% of its domestic and international moat-rated companies have achieved this recognition because of intangible assets defined by Morningstar Research as:

Intangible Assets. Patents, brands, regulatory licenses, and other intangible assets can prevent competitors from duplicating a company's products, or allow the company to charge a significant price premium. For example, patents protect the excess returns of pharmaceutical manufacturers such as Novartis NVS. When patents expire, generic competition can quickly push the prices of drugs down 80% or more.

Economic Moat
Five Sources of Sustainable Competitive Advantage

Five Sources of Sustainable Competitive Advantage

Source: The Morningstar® Economic Moat Rating System.

Intangible Assets in Action: Four Case Studies of Moat Companies

To demonstrate the power of intangible assets in creating economic moats, we highlight two wide moat companies based in the U.S., big pharma Bristol-Meyers Squibb and home-improvement retailer Lowe's. We also explore two narrow moat companies, Germany's big pharma Bayer, and global cruise-ship operator Carnival, headquartered in the U.K.

Bristol-Meyers Squibb Company (BMY US) holds a "wide economic moat" rating from Morningstar, based on its extensive list of patent-protected drugs, global sales force, and economies of scale. Morningstar Research explains that BMY's patent protection "allows the company to price its drugs at levels that translate into superior returns on invested capital compared with its cost (particularly in cancer drugs, a focus for Bristol)." BMY's patents are a strong intangible asset and provide it with plenty of lead time to research and introduce next generation new drugs. Bristol boasts a strong distribution channel and sales force, which help it to partner with smaller drug companies to gain access to externally created drugs. Finally, Bristol benefits greatly from its brand identity, its sheer size, and a healthy balance sheet with ample cash.

Lowe's Companies (LOW US) is the second-largest global home-improvement retailer (behind Home Depot). Morningstar Research gives Lowe's a "wide economic moat" rating based on the company's low-cost position, but the company also benefits from several intangible assets. "The business has been built on customer service, knowledge, and innovation, which are top notch in the home-improvement business." Lowe's also has competitive advantages based on its information technology platform and distribution network, which are key differentiators. The firm has created an integrated supply chain that efficiently routes nearly 80% of all Lowe's merchandise through one of 15 regional distribution centers. Finally, Lowe's strength in logistics and scale generates significant bargaining power with vendors.

Bayer AG (BAYN GR) holds an overall "narrow economic moat" rating from Morningstar: "The combination of the company's wide-moat pharmaceutical business, narrow-moat consumer health and crop science businesses, and no-moat material science business leads us to our narrow moat rating." Bayer's drug business supports a wide economic moat, given its diverse portfolio of patent-protected drugs and a growing number of biologic drugs that are sold through its strong global sales force. Consumers continue to support its marquee drugs, including Aspirin and Aleve, despite heavy generic competition. Bayer's 2014 acquisition of Merck's consumer products increased the scale of Bayer's consumer group. By contrast, however, Bayer's crop science business, including biosciences, face high barriers to entry that weaken this moat.

Carnival PLC ADR (CCL LN) holds a dominant position in the cruise industry and services a diverse group of global consumers. Carnival has more than 100 ships in service with a passenger capacity of over 200,000 and attracts 11 million guests annually. Carnival operates 10 global brands of household names, such as Carnival Cruise Lines, Holland America, and Princess Cruises in North America alone. Morningstar gives Carnival a "narrow economic moat" based on "efficient scale, cost advantages, and intangible brand assets. Carnival captures about half of the total current capacity in the cruise market, and the three biggest constituents of the cruise market (Royal Caribbean, Carnival, and Norwegian) control nearly 90% of the North American market." Morningstar believes that the cruise market is underpenetrated, and the upside potential based on aging demographics is significant both in the U.S. and abroad.

VanEck Vectors® Morningstar Wide Moat ETF (MOAT®) and VanEck Vectors® Morningstar International Moat ETF (MOTI®) provide access to global moat-rated companies, by seeking to replicate the Morningstar® Wide Moat Focus IndexSM and Morningstar® Global ex-US Moat Focus IndexSM, respectively. Each Index tracks the overall performance of attractively priced companies with sustainable competitive advantages in their respective markets according to Morningstar's equity research team.

MOAT holdings and learn more about moat investing

MOTI holdings and learn more about moat investing

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Fallen Angel Market Compressed Along with Spreads https://www.vaneck.com/blogs/etfs/fallen-angel-market-compressed-with-spreads/ Fallen angels have outperformed the broader high yield bond universe year to date, as credit spreads have narrowed. 

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VanEck Blog 6/29/2017 12:00:00 AM

High yield bond credit spreads have narrowed1 this year amid an environment that has included strong stock price performance, comfortable interest rate rises, and low default rates. Since last year, when commodity prices rebounded from the February 2016 lows, the fallen angel market size has diminished from what we view as credit-positive activity related to the extended spread tightening environment. While the universe is smaller than a year ago, and could further decrease should credit spread tightening persist, the market size is currently within its historical range. As such, we believe fallen angels continue to present a viable option for income investors who may want to consider a higher quality concentration when allocating to high yield bonds.

Narrowing Credit Spreads Helped Level the Yield Playing Field

Over the past year, fallen angel credit spreads had narrowed by 196 basis points (bps), tightening less than the broad high yield bond market’s 256 bps.

Narrowing Credit Spreads Helped Level the Yield Playing Field Chart

Source: BofA Merrill Lynch, FactSet. Data as of 6/16/2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. See below for index definitions for the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA, Fallen Angel Index) and the BofA Merrill Lynch US High Yield Index (H0A0 Index, Broad High Yield Bond Index).

Furthermore, the difference in yield2 between the two markets narrowed 69 bps since this time last year. Income investors may find a more favorable yield/quality tradeoff with fallen angels than the broad high yield bond market. The 5.22% yield of fallen angels’ average 78% concentration in BB-rated bonds3 is not that far from the 5.54% yield of the broad high yield bond market, which averages 48% in BB-rated bonds.

Fallen angels have outperformed the broad high yield bond market by 66 bps (5.62% versus. 4.96%) year to date, primarily attributable to their sector overweights in telecommunications, banking, and technology. These sector differences are driven by fallen angel universe migration, which occurs mainly from credit cycles impacting sectors and individual issuers, as seen more acutely last year with the influx of energy and basic industry sector entrants. So far this year, the fallen angel entrant volume has been relatively light at about 3% across the technology, basic industry, and energy sectors.

Fallen Angel Universe Compression

While the current universe size was approximately $149 billion in market value as of June 16, 2017, this falls within the historical universal range ($101 to $194 billion), since Fallen Angel Index’s 12/31/2003 inception.

Fallen Angel Bond Market Size
2003-2017

Fallen Angel Universe Compression Chart

Source: BofA Merrill Lynch, FactSet. Data as of 6/16/2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

The combination of light fallen angel entrant volume and some credit-positive activity has largely contributed to about a net 10% decline in market size thus far in 2017. Specifically, this year’s fallen angels have amounted to about 3% of the universe’s market value; while tender offers (bond buy backs), rising stars (high yield bonds that return to investment grade status), and the roll off of bonds maturing in less than 12 months have amounted to about 13% of market value. This compares to 2016’s activity when the market size only grew slightly by yearend, from a face value4 perspective, even with the significant fallen angel volume in 2016. The market size grew by approximately 34% with new fallen angels by the second quarter, and then decreased by roughly the same percentage from activity that mainly included rising stars, an index rule change, tender offers, calls, and bonds falling below the 12-month maturity minimum. We had previously discussed tender offer activity and the fallen angel index rule change last year, both of which had contributed to a smaller market size.

Fallen Angels Offer a Higher Quality Option

The fallen angel subset of the high yield bond market presents a higher quality option for high yield investors. Those seeking to limit some credit risk in their high yield bond portfolios may increase their BB-rated allocation by investing in fallen angels. Also, the higher BB-rated concentration in fallen angels may offer an attractive complement for some investment grade investors, whose risk appetites may have increased with their demand for higher yields. However, investors should consider the present size of the fallen angel universe and weigh 1) the potential of more credit spread tightening, which may further reduce its size, with 2) the possibility of future credit events, as seen in beginning of 2016, which may increase it.

VanEck Vectors® Fallen Angel High Yield Bond ETF (ANGL®) received a three-year and overall five-star rating from Morningstar, as of May 31, 2017.5 ANGL was rated against 591 funds in Morningstar's U.S. funds 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 (ANGL)

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CCRCs: A Growing Source of Municipal Bonds https://www.vaneck.com/blogs/muni-nation/ccrcs-growing-source-of-municipal-bonds/ CCRCs offer comprehensive senior living solutions in a single location, and are a growing source of muni bonds. CCRC bonds may offer an attractive yield component to high yield muni portfolios.

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VanEck Blog 6/27/2017 12:00:00 AM

As baby boomers swell the ranks of retirees in the U.S., Continuing Care Retirement Communities (CCRCs) offer one option for senior living. Of interest to investors in municipal bonds is the fact that their construction is often financed by issuing tax-exempt or taxable bonds.

CCRCs comprise approximately $34 billion worth of municipal debt, according to Municipal Market Advisors. The majority of CCRC debt falls into the high yield/unrated segment (approximately 80% as shown in this chart), and carry higher risks and higher yields than their investment grade counterparts.

CCRCs Ratings Distribution1
As of 6/16/2017

CCRCs Ratings Distribution Chart

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

We expect this segment of the muni high yield market to continue to grow given the aging population in the U.S. and its increased need for residential healthcare options. In terms of market size, CCRCs are approximately the same size as the tobacco bonds segment within the muni high yield market, as we discussed in The Burning Truth about Tobacco Bonds.

The U.S. Population is Aging

The U.S. elderly population is expected to nearly double in the next 25 years, growing by almost 80 percent.2 The population of those over the age of 65 is projected to reach 83.7 million by 2050.3 For many, living out the rest of their days in their own homes will not be an option. The decision, then, will be choosing between the options available. A CCRC is one of those options.

What are CCRCs?

Continuing Care Retirement Communities provide one-stop shops for seniors, combining most aspects of senior living solutions in a single location. They may include independent residential units where healthy seniors may live on their own, assisted-living units that provide some care, and nursing beds for seniors requiring constant nursing care.

Today, there are roughly 2,000 CCRCs in the U.S., housing some 600,000 residents.4 While each CCRC is different, they are typically paid for out-of-pocket. As retirees take stock of their options, CCRCs will often be among the more expensive options they are likely to consider. Incoming residents typically pay an upfront entrance fee. This may be as low as $20,000 for a rental agreement. However, it could range as high as $500,000, and up, for a buy-in at a luxury establishment.5 This cost will often be supplemented with monthly fees ranging from $500 to $3,000, depending on the level of care provided. The greater the residents’ needs, the greater the cost.

How are CCRCs Structured?

The vast majority of CCRCs are structured as 501(c)(3) not-for-profit organizations under the Internal Revenue Code. However, in recent years the for-profit CCRC market has also grown. These organizations issue municipal bonds through cooperative local government agencies and are typically issued based on certain projections for move-in rates. CCRCs are rarely overbuilt, thanks to the cost and time spent on up-front pre-marketing, which ordinarily secures at least 60% pre-commitments before construction begins. However, CCRCs that broke ground in and around 2005 and 2006 made headlines a few years ago as they struggled with lower-than-expected move-in rates.6

To cover the substantial cost of moving into CCRCs, many seniors use the proceeds from selling their homes. This makes some CCRC-related bonds somewhat sensitive to moves in the housing market. The relationship between the strength of the housing market and the health of CCRC-related bonds was made readily apparent during the recent financial crisis of 2008. As home prices dropped, many seniors held off on selling their homes. Some CCRCs suffered as a consequence, with a handful filing for Chapter 11 bankruptcy.

A Positive Outlook for CCRCs

For investors, as the U.S. gets older, the size of the market for municipal bonds used to finance the construction of CCRCs looks set both to increase, as more of them are built, and to offer interesting opportunities. The graying of American baby boomers, and the consequent increasing demand for CCRCs, is likely to result in greater issuance of both tax-exempt and taxable bonds in the coming years.7

An Attractive Yield Component

Given their risk profile, CCRCs may offer an attractive yield component to high yield portfolios. Many come to market without ratings attached, putting the analysis squarely into the hands of analysts who recommend them for inclusion in portfolios. And since they are "start-ups", additional returns must accompany these issues to bring buyers to the table. Thus, CCRCs do occupy a meaningful part of most municipal high yield bond portfolios. Those that do successfully complete construction, fill their residential units to near capacity, and operate within the expected targets, can generate meaningful returns to investment portfolios such as VanEck Vectors® High-Yield Municipal Index ETF (HYD®) and VanEck Vectors® Short High-Yield Municipal Index ETF (SHYD®) , where they occupy a prominent sector allocation and provide diversification to each.

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Your Emerging Markets Bonds Allocation May Now Be “Junk” https://www.vaneck.com/blogs/emerging-markets-bonds/your-allocation-may-now-be-junk/ VanEck Blog 6/23/2017 11:18:16 AM

Emerging Markets Bond Allocation Insights

Investors are once again focusing on emerging markets credit risk given the recent high-profile ratings downgrades of China, Brazil, and South Africa. The overall credit quality of the hard currency emerging markets debt market has declined significantly since 2013. More than 51% of the J.P. Morgan EMBI Global Diversified Index ("Index") was rated high yield or "junk" as of May 31, 2017, versus just 34% at the end of 2013.

This means that emerging markets bonds investors are likely to have more "junk" in their portfolios, and are assuming significantly more credit risk than they were only four years ago. Since 2013, the average emerging markets bond rating has dropped from BBB- to BB+. At the same time, yields and spreads have tightened, and investors are getting paid less to assume more risk.

Ratings Downgrades Have Increased…

Why worry about the "junk"? Because there is more of it. Moody's downgrade of China in May received the most attention, but had less impact on investors given its lack of presence in emerging markets bonds indices. On the other hand, Brazil and South Africa suffered ratings downgrades that have had a greater impact for investors. Both countries have been punished by elevated political risks that have threatened key fiscal and economic reforms. South Africa was downgraded by both S&P and Fitch from investment grade status to high yield status. Brazil, which was placed on negative watch by S&P, lost its investment grade rating in 2015.

The Portion of EM Bonds Rated High Yield Has Increased Since 2013
J.P. Morgan EMBI Global Diversified Index Credit Quality: 1997 to 5/31/2017

The Portion of EM Bonds Rated High Yield Has Increased Since 2013 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.

…Even as Spreads have Tightened

Since the end of 2013, the spread on the J.P. Morgan EMBI Global Diversified Index is essentially unchanged. However, breaking the Index into high yield (HY) and investment grade (IG) subsets tells a different story. Both segments tightened, but the high yield portion tightened more than investment grade (in both absolute and percentage terms). Because of the higher tilt towards high yield over this period, this tightening has been less evident at the overall Index level.

Spread Change
December 2013 to May 2017

Spread Change 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.

Spread measures the difference between the yield to worst of the J.P. Morgan EMBI Global Diversified Index (or its high yield or investment grade subsets) and U.S. Treasury bonds with the same average maturity.

Where Can Investors Find Value? Look to Higher Quality and Local Currency Bonds

With higher credit risk and tighter spreads, where can investors find value?

One option is to focus on the higher quality portion of the J.P. Morgan EMBI Global Diversified Index. For example, the J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index, which is comprised primarily of investment grade rated bonds with a limited BB rated allocation, had a yield of 3.74% as of May 31, 2017. That equated to a nearly 60 basis points pickup in yield versus U.S. dollar-denominated investment grade corporate bonds as measured by the Bloomberg Barclays U.S. Corporate Bond Index. Investors have access to investing in this higher rated Index through VanEck Vectors® EM Investment Grade + BB Rated USD Sovereign Bond ETF (IGEM®).

Alternatively, investors may consider local currency sovereign emerging markets bonds to address credit risk concerns. Unlike the hard currency market, the universe of local currency bonds is still rated investment grade, on average. There are a few reasons for this. First, debt denominated in an issuer's local currency is often rated higher than foreign currency denominated debt (e.g., U.S. dollar or euro) by the same issuer. That is because foreign currency movements do not directly impact the ability of the country to repay its local currency-denominated debt. Further, the countries that are able to issue local currency debt globally tend to have larger and more developed local markets that are accessible to foreign investors. More open markets and less external vulnerability generally translate into higher credit ratings. Investors assume the foreign currency risk by investing in local currency bonds but have reduced credit exposure and earn higher yields.

 

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Can “Brown” Companies Issue Green Bonds? https://www.vaneck.com/blogs/etfs/brown-companies-issue-green-bonds/ The answer is “yes”. Green bonds can be issued by both “green” and “brown” issuers, but they must have a positive environmental impact and meet stringent criteria for index inclusion.

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VanEck Blog 6/22/2017 12:00:00 AM

Issuers in "Brown" Sectors Can Issue Green Bonds…

Green bonds are defined by the projects they finance, rather than the "green credentials" of the issuer. Any issuer, even those in industries such as oil and gas production, can issue green bonds as long as proceeds finance environmentally friendly projects and the issuer meets certain disclosure requirements. Green bond investing focuses on bonds from all types of issuers that can have a positive environmental impact, rather than taking an exclusionary screening approach.

One of the benefits of a green bond from a "brown" issuer is that it could feasibly have a greater overall environmental benefit than a green bond issued by a company that is already "green". Imagine, for example, an oil and gas producer that decides to transition away from its high carbon intensity operating model by investing in renewable energy projects, financed by a green bond.

…But They Must Fund Truly Green Projects

A few "brown" U.S. utilities have successfully brought to market green bonds. For example Southern Power was the first investment grade power producer in the U.S. to issue a green bond. Projects financed by its 2015 bonds include solar facilities in California and Georgia, and a wind power facility in Oklahoma. These projects fit within the Climate Bonds Initiative's (CBI) green bond classification system, which is designed to be consistent with the goal of rapidly transitioning to a low-carbon economy to avoid dangerous climate change. As a result, the company's bonds are included in the S&P Green Bond Select Index, which the VanEck Vectors Green Bond ETF (GRNB) seeks to track.

A recent bond issued by European oil and gas producer Repsol provides an interesting comparison to Southern Power's green bonds. Repsol's €500M bond issued in May will finance energy efficiency improvements in its chemical and refinery facilities. However, by improving the efficiency of existing fossil fuel processing facilities, the projects financed by the Repsol bond could potentially extend their useful life and make them more economical. As a result, these projects (similar to "clean coal" technology) do not fit within the CBI's green bond classification system. Accordingly, Repsol's green bond was not eligible for inclusion in the S&P Green Bond Select Index.

If Repsol instead financed renewable energy projects with this bond, it would likely have been eligible for inclusion in the Index. Although the "use of proceeds" did not satisfy many green bond investors' requirements, Repsol did provide transparency, obtain external verification and commit to ongoing reporting, which is in line with the best practices recommended by the Green Bond Principles.

Rigorous Framework to Assess Green Bonds

For investors interested in sustainable investing, we believe it is important to have a rigorous framework to evaluate each green bond to avoid the potential for "greenwashing". The examples we discussed also illustrate the benefit of using transparent eligibility criteria versus a more subjective approach. The CBI is an independent third party that is leading the development of green bond market standards globally, and reviews each bond to ensure they satisfy certain criteria, including the types of projects the bond proceeds are used to finance. The S&P Green Bond Select Index only includes bonds flagged as "green" by the CBI, providing assurance to investors that their investment is having a positive impact.

VanEck Vectors Green Bond ETF (GRNB) is the first U.S.-listed fixed income ETF to provide targeted exposure to the fast-growing green bonds market. GRNB was launched on March 3, 2017, and 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.

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Return to Neutral https://www.vaneck.com/blogs/allocation/return-to-neutral/ VanEck NDR Managed Allocation Fund performed well in May, with its overweight exposure to stocks leading the performance contributors. The Fund’s allocations have shifted to support neutral weightings to stocks and bonds. 

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VanEck Blog 6/20/2017 9:32:25 AM

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.

Stock Exposure Helps May Performance

VanEck NDR Managed Allocation Fund (NDRMX) performed well in May, gaining 1.71% versus 1.69% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Index).1

The largest contributor to performance was the Fund’s overweight exposure to stocks, as global stocks outperformed bonds in May. The U.S. and Europe ex U.K were the largest regional equity contributors to performance. Outperformance from the U.S. was due to the Fund’s significantly overweight relative positioning in large-cap and growth. The largest regional equity detractors from performance were Pacific ex Japan and the U.K.

Fund Positioning June 2017: Equity Exposure is Reduced

At the start of June, VanEck NDR Managed Allocation Fund's (NDRMX) allocation shifted meaningfully. The equity allocation was reduced from 75.5% to 61.0%, the bond allocation increased from 24.3% to 38.4%, and the minimal cash position remained relatively unchanged at 0.6%. The largest regional equity shifts were reductions to the U.S. and Pacific ex Japan. Within U.S. equities, the large-cap value positioning was significantly reduced.

This allocation shift, from a strong overweight equity position to a near neutral allocation, reflects one of the key benefits of the Fund – nimbleness. The Fund quickly shifted exposure in response to changing market conditions. Capturing upside performance is always important, but protecting on the downside is the key to meaningful long-term outperformance.

Fund Positioning June 2017 Pie Charts

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

May 2017 Performance Review

May delivered what felt like a seemingly never-ending barrage of negative events. The most notable were the heightened political drama unfolding in Washington and acts of terrorism in the U.K. However, the bull market was able to shrug off the challenging news and continue its path higher, with global stocks up 2.30% and U.S. bonds up 0.77%.

The benefits of the equity rally were not enjoyed uniformly across all regions. The top performing regions were developed Europe, Japan, and the Emerging Markets. The U.S., Canada, and Pacific ex Japan lagged. Within the U.S., there was a big dispersion in performance among market capitalization and style, with large-cap and growth significantly outperforming small-cap and value.

VanEck NDR Managed Allocation Fund's (NDRMX) asset class positioning was a significant contributor to performance in May. The Fund held a 75.5% allocation to global stocks and a 24.3% allocation to bonds relative to a neutral allocation of 60% global stocks and 40% bonds. This helped performance as global stocks outperformed U.S. bonds by 1.53%.

The relative performance of the regional equity positioning was mixed. The largest regional equity contributors were overweight positions in the U.S. and Europe ex U.K., which returned 1.67% and 4.97%, respectively. The largest regional equity detractors were an overweight position in Pacific ex Japan and having no exposure to the U.K. The Fund’s holding in Pacific ex Japan returned -1.32% while the MSCI U.K. Index returned 4.64%.

The Fund’s overall U.S. equity exposure returned 1.67% compared to 1.02% for the Russell 3000 Index. Positioning within the U.S. contributed significantly to this excess performance, notably the overweight exposure to large-cap over small-cap and growth over value.

Total Returns (%) as of May 31, 2017
  1 Mo Since Inception
Class A: NAV
(Inception 5/11/16)
1.71 12.45
Class A: Maximum 5.75% load -4.12 6.32
60% MSCI ACWI/
40% BbgBarc US Agg.1
1.69 11.10
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: Supports Neutral Weightings to Stocks and Bonds

Global stocks (as measured by the MSCI All Country World Index) are now up 11.26% this year. Will the bull market keep on running? We remain cautious.

From a technical perspective, the market looks poised for higher returns. The chart below shows the aggregate reading of the NDR technical indicators that determine the stock-to-bond allocations. Three of the five technical indicators are bullish: momentum, breadth, and mean reversion. The only bearish technical signal is from an overbought/oversold indicator. The last indicator, seasonality, which measures the historical price patterns that result from the market’s recurring tendencies, is neutral and will remain that way until late summer when it turns bearish.

NDR Stock/Bond Technical Composite
2012 to 2017

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

Source: Ned Davis Research. Data as of May 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.

On the other hand, the sentiment and fundamental indicators tell a different story. The Ned Davis Sentiment Composite, an aggregation of various sentiment indicators designed to gauge how investors feel about the current investment climate, just turned bearish. Indicators that comprise the composite include measures such as investor surveys, asset flows, valuations, volatility, and put/call ratios. The composite is signaling that sentiment became extremely optimistic in early May (a warning sign that stocks may be overbought) and then began to revert towards normal levels as the month progressed (a signal that sentiment is reversing and an indication to reduce exposure).

NDR Daily Trading Sentiment Composite

NDR Daily Trading Sentiment Composite Charts

Source: Ned Davis Research. Data as of May 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.

Another indicator that recently turned bearish is the NDR Global SHUT Index. SHUT is an acronym for Staples, Healthcare, Utilities, and Telecommunications and represents the defensive sectors. Defensive sector leadership is typically analogous with weak market conditions. The NDR Global SHUT Index indicator turns bearish when the short-term trend rises above the long-term trend.

NDR Global Shut Index
2012-2017

NDR Global Shut Index Chart

Source: Ned Davis Research. Data as of May 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, based on bullish technical readings and bearish macroeconomic, fundamental, and sentiment readings, supports neutral weightings to stocks and bonds.

NDR Overall Stock/Bond Indicator Composite
2012-2017

NDR Overall Stock/Bond Indicator Composite Chart

Source: Ned Davis Research. Data as of May 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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Opportunities Abroad https://www.vaneck.com/blogs/moat-investing/opportunities-abroad/ International moat stocks stood out in May by posting strong relative returns, a persistent year-to-date trend. U.S. moats lagged the U.S. market, but continued to remain ahead year-to-date.

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VanEck Blog 6/15/2017 12:00:00 AM

For the Month Ending May 31, 2017

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or “U.S. Moat Index”) lagged the S&P 500® Index in May (0.51% vs. 1.41%). Despite this underperformance, the U.S. Moat Index remains ahead of the S&P 500 Index year-to-date (10.68% vs. 8.66%). International moat stocks, as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or “International Moat Index”), stood out in May by posting strong returns relative to the MSCI All Country World Index ex USA (4.25% vs. 3.24%), which expanded its outperformance gap for year-to-date 2017 (18.07% vs. 13.74%).

U.S. Domestic Moats: Ups and Downs

McKesson Corp (MCK US, +17.93%) rebounded in May after facing headwinds in previous quarters. The firm posted solid results for its fiscal fourth quarter which Morningstar equity analysts believe reaffirms their view of the company’s long-term fundamentals. MCK US was the top performer in the U.S. Moat Index in May and remained undervalued in Morningstar’s view at month end. In terms of sector performance in May, information technology was the top contributor to the U.S. Moat Index’s performance, with all five sector constituents posting positive performance. By contrast, the financials, consumer staples, real estate, consumer discretionary, and materials sectors all detracted from U.S. Moat Index performance in May, and were the primary reason for the Index’s underperformance relative to the S&P 500 Index. Twenty-First Century Fox, Inc. (FOXA US, -11.20%) was the worst performing Index constituent in May, primarily due to disappointing fiscal third quarter results driven by its film studio unit.

International Moats: Ever Hear of Weibo?

Information technology companies, despite only accounting for roughly 6% of the International Moat Index, were the top contributors to Index performance in May. SINA Corp. (SINA US, +27.55%), an online media company in China, was the standout company in the information technology sector and for the International Moat Index as a whole. SINA Corp is the largest shareholder of Weibo (WB US), a twitter-like service in China. Healthcare firms in the United Kingdom and France posted strong results in May. Japan was the top contributing country to the International Moat Index, while Mexico and Sweden were the top detractors. The energy and utilities sectors, both represented by only one constituent, posted negative returns and were the only two sectors to detract from International Moat Index performance in May. In total, 52 of the 72 International Moat Index constituents provided positive performance in May.

(%) Month Ending 5/31/17

Domestic Equity Markets

International Equity Markets

(%) As of 5/31/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 5/31/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
McKesson Corporation MCK US 17.93
Yum China Holdings, Inc. YUMC US 12.57
AmerisourceBergen Corporation ABC US 12.32
Yum! Brands, Inc. YUM US 10.48
Varian Medical Systems, Inc. VAR US 9.12

Bottom 5 Index Performers
Constituent Ticker Total Return
CVS Health Corporation CVS US -6.80
Lowe's Companies, Inc. LOW US -7.20
Allergan plc AGN US -7.96
Biogen Inc. BIIB US -8.64
Twenty-First Century Fox, Inc. Class A FOXA US -11.20

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
SINA Corp. SINA US 27.55
Rakuten, Inc. 4755 JP 18.91
William Demant Holding A/S WDH DC 14.73
Kao Corp. 4452 JP 14.49
Orange SA ORA FP 13.74

Bottom 5 Index Performers
Constituent Ticker Total Return
Ramsay Health Care Limited RHC AU -4.30
Vicinity Centres VCX AU -4.60
Cemex SAB de CV Cert Part Ord Repr 2 ShsA & 1 ShsB CEMEXCPO MM -6.03
AMP Limited AMP AU -6.21
Carsales.Com Limited CAR AU -7.07

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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Global Oil Supplies Tighter Despite “Glut” https://www.vaneck.com/blogs/natural-resources/global-oil-supplies-tighter-despite-glut/ Why all the focus on U.S. oil production given that it is just 5% of world’s supply? The media headlines about a “widespread oil glut” are missing a long-term secular trend of tighter global oil supplies.

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VanEck Blog 6/13/2017 12:00:00 AM

Too Much Energy Spent Paying Attention to U.S. Shale

While oil prices have dropped this year (down from approximately $52 a barrel at the start of the year and stalling now at $45), we believe the headlines about a "widespread oil glut" are missing a long-term secular trend of tighter global oil supplies that are likely to support higher oil prices ahead.

U.S. shale oil production accounts for a little over 5 million barrels per day yet seems to be the only focus of the market: What about the other 91 million barrels?1

An inordinate amount of time is spent worrying about U.S. shale oil production, in our opinion. The reality is that the U.S. shale industry currently produces less than 5.5 million barrels (Bbl) per day (or just 5.6% of the world's daily total). What the markets should really worry about is the more than 91 million barrels per day that don't come from U.S. shale.

Focusing on the wrong thing is not uncommon among media and some oil market pundits looking to create volatility rather than rational behavior. Markedly, in these past several months, markets seem to have overreacted (and driven oil prices down) on news of U.S. inventory levels declining less than expected and, most recently, nonsensical hopes of a longer and deeper OPEC (Organization of the Petroleum Exporting Companies) quota agreement.

Oil Supplies Will Tighten

We see the global oil market as much tighter than portrayed:

  • Global demand growth is remarkably healthy – especially considering the anemic global GDP growth of the last few years. Given broad expectations of improvements in global GDP, the risk is that consumption growth exceeds current consensus forecasts.
  • Non-shale production could struggle to keep up with consumption and soon may be in a multi-year structural decline because of the colossal reductions in capital spending (capex) and associated record low discovery levels.
  • The OPEC "put" is firmly in place and underpinned by a historical resolve both within OPEC and with other major non-OPEC producers (i.e., Russia). In our view, the OPEC "put" entails continued concerted OPEC actions to keep crude prices above $50/Bbl.
  • Global inventories should end up well below the 5-year average levels by the end of 1Q 2018 and even below the 10-year low if the current quota agreement were to be extended through all of 2018. This analysis assumes higher U.S. shale production and moderate demand growth.

In the face of these realities we believe in the following statement made by Khalid A. Al-Falih, Saudi Arabia's Minister of Energy, Industry, and Mineral Resources, in his opening address at the recent OPEC meeting: "Investment flows into the upstream sector have picked up, albeit at a slower pace than required to meet forecast long-term demand." This underscores our long-held view that OPEC's efforts to increase short-term pricing is more about incentivizing capital investments sufficient to meet consumption growth rather than stemming any dramatic decline into the sub-$40/Bbl range.

Evaluating Today's Oil Market

According to International Energy Agency (IEA) figures (report dated May 16, 2017) and the U.S. Energy Information Administration (EIA), the estimated average of world oil supply and demand during 2016 and 2017 are as follows:

(million barrels/day) 2016 2017 Change %
Total Demand 96.6 97.9 1.3
Total Supply 97.0 96.8 (0.2)
U.S. Shale 4.9 5.5 0.6
Non-OPEC, non-shale 52.8 52.8 -
OPEC (incl. NGLs) 39.3 38.5 (0.8)

Global Oil Demand Growth is Resilient

Global oil demand growth is forecasted by the IEA at 1.3 million Bbl/day in 2017. This is in comparison to the average growth of 1.4 million Bbl/day and 1.3 million Bbl/day over the last 5 and 15 years, respectively. This resilient consumption growth has been in the face of the weak post-financial crisis GDP growth.

Global Oil Demand
1995 to 2018e

Global Oil Demand Chart

Source: EIA; Bloomberg; IMF. 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.

Notably, the IEA (International Energy Agency) has consistently underestimated demand growth. Given expectations of a strengthening global economy and an uplift in GDP, we would suggest the risk to this demand estimate is to the upside.

Global Oil Supplies are Declining

There is no doubt that U.S. shale production has responded to higher prices and will likely continue to grow at a robust pace. Nevertheless, even if OPEC were to return to its record level of production at the end of the current quota agreement, supply from non-OPEC, non-shale sources would have to increase to meet average demand growth in 2018. Higher non-OPEC, non-shale supply seems unlikely given the extremely poor drilling performance over the last several years.

The following two charts show that both oil discoveries and sanctioned projects hit new lows in 2016. The first chart shows that in 2016, the volumes of conventional oil found outside of onshore North America were at their lowest levels since 1952. The second chart shows that conventional resources sanctioned for development in 2016 fell to 4.7 billion barrels (30% lower than 2015), as the number of projects that received a final investment decision dropped to the lowest level since the 1940s according to IEA.

Conventional Oil Discoveries Plunge to Record Low in 2016*
1948-2016

Conventional Oil Discoveries Plunge to Record Low in 2016 Chart

Source: IHS Energy. Data as of December 31, 2016. *Data excludes onshore Canada, U.S. lower-48 onshore, and U.S. shallow water.

Conventional Oil Resources Sanctioned Hit Record Low in 2016
2000-2016

Conventional Oil Resources Sanctioned Hit Record Low in 2016 Chart

Source: IEA; Rystad. Data as of December 31, 2016.

OPEC and Falling Inventories

Starkly illuminating the market's fixation on the potential impact of U.S. shale output on the global supply/demand balance is the apparent disregard of the historic agreements coming out of the May 25, 2017, OPEC meeting and recent trends in both worldwide and U.S. inventory levels. Simply put, OPEC and its partner producers (such as Russia) have made it abundantly clear, as seen in the quotations below, that they will follow the path of the major central banks of the world, i.e., they will do whatever it takes to create a balanced and hopefully relatively stable oil market. We believe that this means crude prices will neither get too high nor too low.

  • Khalid A. Al-Falih, Saudia Arabia's Minister of Energy, Industry and Mineral Resources: "…I attended a meeting of the Saudi and Russian leadership at the Kremlin, during which both our nations renewed their determination to rebalance the global crude oil market in the interest of greater market stability ― and restated our commitment to doing whatever it takes, together with other like-minded producers, to attain those goals."2 May 31, 2017.
  • Alexander Novak, Russia's Energy Minister, told CNBC after the meeting that there were instruments in place to react to any situation, such as an aggressive fall in oil prices. He told CNBC when asked about the possibility of deeper cuts to production: "You know, we have the capability to react to any situation that might arise on the market. And to this end we have a technical committee working on this every month."3

More tangibly, despite seemingly constant rhetoric to the contrary, crude oil stocks in the U.S. and at the OECD (Organisation for Economic Co-operation and Development) level have been falling for quite some time and are on a path to fall well below the 5-year average target that OPEC has identified as its target milestone for a balanced market. Additionally, if the agreement was to be extended again, for example, through all of 2018, crude inventories could fall precipitously, potentially leading to an undesirable price spike.

OECD* Total Inventories (Days Demand) vs. WTI Crude Oil (On Inverted Axis)
1Q 2009 – 4Q 2018e

OECD* Total Inventories (Days Demand) vs. WTI Crude Oil (On Inverted Axis) Chart

Source: EIA; IEA; Bloomberg; VanEck. Data as of May 31, 2017. *OECD refers to the Organisation for Economic Co-operation and Development. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Energy Equities Should Benefit from Firming Fundamentals

Amplifying the befuddling oil market's response to firming fundamentals has been the equity market's treatment of many of the culprits of surging shale oil production. Since the trough of oil prices in February 2016, WTI prices have increased roughly 81% (from $26 to $47 a barrel), while North American oil shale/unconventional oil producers equity values have risen a meager 49%, on a cumulative basis.4 This share price performance has been in spite of the fact that many of these players have shown unprecedented improvements in well productivity and operational efficiency that has allowed them to project historically unique and compelling multi-year outlooks that entail long-term, low-risk growth. In our view, as supportive oil market fundamentals begin to be properly recognized, we believe that energy company equities will begin to appreciate in price.

Additional VanEck Resources on Oil Markets:
Watch May 17 video: Oil Supplies Will Tighten.
Read March 10 post: Oil Price Drop Not Surprising, Global Demand to Provide Support.

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Gold Reacts to Dwindling Reflation Trade https://www.vaneck.com/blogs/gold-and-precious-metals/dwindling-reflation-trade/ VanEck Blog 6/9/2017 12:01:25 PM

Weak U.S. Dollar, Economic and Political Stability Support Gold Price Recovery

The gold price changed very little in May, recovering towards the end of the month after early weakness brought on by the French presidential election and the FOMC (Federal Open Market Committee) meeting. From the first round of the French elections on April 23 to the final round on May 7, markets became increasingly convinced that the pro-EU candidate Emmanuel Macron would win the election. This pressured gold as the risk of a Marine Le Pen-led Eurozone break-up lessened. On May 3, comments by the Federal Reserve following its May FOMC meeting convinced the market that a rate increase following the June 13 meeting would be likely. Gold hit its low for the month on May 9 at $1,214 per ounce, but was able to regain lost ground to end the month up $0.65 (0.05%) at $1,268.94 per ounce. Weakness in the U.S. dollar also added support for gold during the month. The U.S. Dollar Index (DXY)1 fell 2.1% in May and appears to have entered a bearish downtrend since reaching multi-year highs in early January. Economies in Europe and Japan have stabilized recently and the Trump administration has indicated a desire for a weaker U.S. dollar. Gold should benefit if the U.S. dollar trend seen so far in 2017 continues.

Asian Demand for Physical Gold Strong in 2017

Physical gold demand from India and China has also been supportive of gold prices. We believe healthy demand in March and April along with anecdotal comments from analysts suggest that 2017 is shaping up to be a much better year for gold in Asia. Last year's liquidity squeeze caused by the currency transformation in India seems to have dissipated and people are again making gold purchases. In China, bond market turbulence associated with government efforts to rein in debt and speculation have spurred investment demand for gold.

Juniors and Mid-Tiers Underperform But Not Based on Fundamentals

Chart patterns for the gold equity indices mimicked gold bullion in May. The NYSE Arca Gold Miners Index2 (GDMNTR) gained 1.07%, while the MVIS™ Global Junior Gold Miners Index3 (MVGDXJTR) fell 3.66%. The juniors and some mid-tier gold miners have underperformed the larger producers over the past two months with no significant change in gold bullion prices. We find no fundamental reason for the underperformance, and therefore expect some mean reversion to favor the juniors in the second half of the year.

Is U.S. Equity Market Bubble Set to Burst?

Following the November presidential election the "reflation" or "Trump" trade took the markets by storm. Presumably, the belief was that pro-growth policies would ignite animal spirits in the markets that would stimulate business and prosperity. As President Trump has struggled to implement policies and his administration has been dogged by controversy, the Trump trade has unwound. Metals such as copper and iron-ore have given up much, if not all, of their post-election price gains. Gold has rebounded from its post-election losses. Interest rates have subsided and the DXY has fallen to pre-election levels. The one asset class that appears to still believe in the reflation trade is U.S. equities. As we write, the S&P 500 Index4 has reached new, all-time highs. In the past year, the likes of Apple and Tesla have posted gains of more than 50%. A chart of NYSE margin debt is worth a thousand words.

NYSE Margin Debt Continues to Grow, Reaches Record High in April

NYSE Margin Debt Chart

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

Notice the peaks at the tops of the tech (2000) and housing bubbles (2007) compared with current levels. Each of these bubbles was accompanied by strong 3% to 4% economic growth and each was preceded by a Fed tightening cycle. While the current stock market does not have the same feeling of mania seen before the tech bust, in the context of an economy that struggles to achieve 2% growth, we struggle to justify current stock market valuations – and the Fed is tightening. At the other end of the spectrum are gold stocks, fresh off of the worst bear market in their history from 2011 to 2015. A chart in our April update showed gold stock valuations below long term averages. Secular market tops and bottoms are notoriously difficult to predict, however, we believe the signs are there to make such a prediction for S&P stocks and gold stocks respectively.

Industry's Current Growth Strategy Reflected in Strategy's Corporate Activity Level

Our gold strategy performance received a boost in May when each of our top three junior positions became the targets of corporate activity.

  • Gold Road Resources5 discovered the multi-million ounce Gruyere deposit in Western Australia in 2013. Currently under development, Gruyere is set to begin producing gold in 2018. On May 19 South Africa-based major Gold Fields6 announced the purchase of a 10% stake in Gold Road at a 27% premium to the closing share price.
  • In 2007 Continental Gold7 purchased Buritica, a small scale gold operation in Colombia with production that dates back to 17th century colonial times. Through exploration and drilling, Continental has identified a multi-million ounce, high-grade deposit that is scheduled to become Colombia's first large-scale underground mining operation in 2020. On May 11 Denver-based major Newmont Mining8 announced the purchase of a 19.9% position in Continental at a 46% premium to the closing share price.
  • In 2014 Integra Gold9 bought the historic Sigma and Lamaque Mines in Quebec, Canada. From 1935 to 1985 the property produced 4.5 million ounces of gold. In 2015 Integra discovered mineralization in the Triangle deposit that the old timers missed. Triangle now has a resource of 1.8 million ounces and the company was making plans to construct a mine and expand the resource further. On May 14 Vancouver-based mid-tier Eldorado Gold10 announced the friendly takeover of Integra at a 51% premium to the closing share price.

We were early investors in each of these gold development companies and have visited each of their properties. We increased our positions as they added value to their projects. Our conviction grows when a large gold company, with their teams of geologists and engineers, decides one of our portfolio companies is of strategic importance. We can't remember ever seeing three of our companies receiving such attention in a single month. This is a reflection of the current growth strategy in the sector. In past cycles, large companies have been guilty of overpaying for acquisitions and destroying value. They would wait until a junior advanced a project to the point of construction. Instead, producers are now taking strategic equity stakes at an earlier stage in companies with properties they believe will develop into mines. That way, if they pull the acquisition trigger, they don't have to pay a premium on the portion they own. Eldorado used this strategy by taking a 15% stake in Integra in 2015 at C$0.28, versus the C$1.21 they are now paying for the portion of Integra they do not own.

Acquisition activity has been subdued in the sector, while strategic positioning has become a frequent occurrence. In some cases, two producers have taken a strategic stake in the same junior developer. Not all gold properties become profitable mines and not all producers will have the same success that Eldorado has had with Integra. Gold production is no longer growing globally and many companies will face declining production in the years to come. To offset this, once the current phase of strategic positioning has run its course, we believe there will be another robust M&A cycle, possibly beginning in 2018.

Download Commentary PDF with Fund specific information and performance

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Tackle Climate Change Risk with Green Bonds https://www.vaneck.com/blogs/etfs/green-bonds-tackle-climate-change-risk/ VanEck’s William Sokol discusses GRNB and the green bonds market with Justine Leigh-Bell, Director of Market Development at the Climate Bonds Initiative.

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VanEck Blog 6/9/2017 12:00:00 AM

Watch Video Tackle Climate Change Risk with Green Bonds  

William Sokol, ETF Product Manager, and Justine Leigh-Bell, Director of Market Development at the Climate Bonds Initiative.

Watch Now  


The Launch of GRNB

Green bond issuance in 2017 is expected to reach $150 billion, as shown in the chart below. 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 was launched on March 3, 2017, and seeks to track the performance and yield characteristics of the S&P Green Bond Select Index (SPGRNSLT),1 part of a suite of green indices introduced by S&P.

GILLIAN KEMMERER: This year VanEck debuted the first green bond ETF in the United States, VanEck Vectors Green Bond ETF with the ticker GRNB. Bill Sokol, ETF Product Manager at VanEck, and Justine Leigh-Bell, Director of Market Development at the Climate Bonds Initiative, are here to tell us more. Bill, please introduce us to the ETF.

WILLIAM SOKOL: GRNB provides targeted exposure to the global green bonds market, which has grown tremendously over the past few years and essentially doubled in size in 2016. GRNB seeks to track the S&P Green Bond Select Index, which is comprised of bonds issued around the world to finance projects that have a positive impact on the environment.

Importantly, the Index only includes "labeled" green bonds that have been flagged as green by the Climate Bonds Initiative. That flag allows for a rules-based approach to select eligible bonds within the Index, and the additional disclosure that you get from labeled green bonds provides clarity into a bond's proceeds ― specifically the types of projects that the bond is going to finance. That additional disclosure is a cornerstone of the labeled green bonds market and the Climate Bonds Initiative flag helps to provide that additional visibility to investors.

What is the CBI, Climate Bonds Initiative?

KEMMERER: Justine, please give us an overview of the Climate Bonds Initiative.

JUSTINE LEIGH-BELL: The Climate Bonds Initiative (CBI) is a nonprofit global organization based in London. Our core focus is to mobilize debt capital markets for climate change solutions ― investments that are geared toward climate mitigation or adaptation and resilience, which is also becoming incredibly important. Our goal is to reach US$1 trillion in investments that are facilitating a rapid transition to a low-carbon global economy by 2020.

CBI is completely focused on building investor credibility for green bonds via market development, and international standards and certification. We have analytical components that track the market, and engage with issuers and investors on the latest trends and where the market is going. The organization has a number of different work streams that help leverage and drive market growth.

How do Green Bonds Differ from other Bonds?

KEMMERER: For investors not yet familiar with green bonds, please tell us what they are and why they are getting so much attention lately.

LEIGH-BELL: Green bonds are like any other bond. There is nothing innovative about them except that the use of proceeds is to finance 100%-eligible projects and assets that will deliver on a green agenda. Much of what we have seen thus far has been geared toward climate change, and additional environmental and even social benefits. We're also beginning to see those features. For green bonds, there is very clear disclosure and transparency around both the use of proceeds and making sure that those proceeds are financing 100% green projects and assets.

How Green Bonds Fit into a Fixed Income Portfolio

KEMMERER: How do green bonds fit into a larger portfolio?

SOKOL: We should start by looking at the type of exposure that green bonds offer. Green bonds have evolved over the past few years into quite a diverse opportunity set in terms of issuer type, currency, and geography.

If we look at the S&P Green Bond Select Index as a proxy for the green bonds market, we see about a third of outstanding issues coming from government and government-related issuers that include supranationals like the World Bank or the European Investment Bank, government agencies and, more recently, sovereign issuers. Another third comes from financials. Commercial banks, for example, might issue a green bond to fund loans that help to finance environmentally friendly projects.

The remaining third are corporate issues. Utilities are a natural player in this space, and there are green bonds from industrials, consumer-oriented companies, and tech companies as well. In 2016, for instance, Apple came out with the largest U.S. corporate green bond issued to date.2

Green Bonds Provide Global Bond Exposure High in Credit Quality…

With green bonds, you can have multi-sector global bond exposure that is also high in credit quality: about 95% is investment grade, mostly AA or better.3 From a yield, duration, and credit-quality perspective, the overall green bonds market resembles a global aggregate bond type of exposure.

From a portfolio construction perspective, you can seamlessly allocate to green bonds within your global bond portfolio without significantly impacting your risk/return profile. For U.S.-centric portfolios, green bonds provide the added diversification that you get from global bond investing.

…Providing a Hedge Against Climate Change Risk

Another important point about the role of green bonds in a portfolio is that they provide broad exposure to a group of issuers that are taking a deliberate, strategic approach to addressing and mitigating climate change risks in their investing and operational plans. In a traditional bond portfolio, those risks may not be fully priced in, so green bonds can be a way to potentially hedge against those risks.

There are many ways that you can use green bonds in a fixed income allocation. In all cases the result is, of course, a greener bond portfolio.

KEMMERER: Given the global nature of this initiative, what are some of the developments around the world that are going to influence the growth of the market moving forward?

Investor Demand is Fueling Green Bonds Market

LEIGH-BELL: To Bill's point, investor demand has been driving this market, and it has been fundamentally about risk. One of the things that has been coming up in my meetings here in New York with investors is that they want to see more corporate green bond issuance. That is the biggest opportunity that we see happening here in the U.S. When they start to see companies issuing green bonds, investors find this attractive because it says the company is taking a long-term strategy to identify climate risk and that issuing green bonds is one way to address it. That's becoming incredibly appetizing for investors.

On the global stage, we have the Paris (Climate) Agreements where countries like China, India, and even the U.S. have stepped up and committed themselves, which has sent a very strong policy signal to investors about how seriously countries are taking climate change. There's been a domino effect on the back of that. [On June 1, President Trump announced the U.S. withdrawal from the 2015 Paris Agreement on Climate Change; read blog post Paris Exit Won't Squash Green Bonds.]

We have also had global investor statements at every international forum in the past two years. Big investors are stating that they want to invest up to US$2 billion in green bonds and set up funds accordingly.

China is the Largest Green Bonds Issuer

LEIGH-BELL: One of the most exceptional developments that we have seen has been with China. China has become the largest issuer of green bonds globally, with close to US$40 billion issued so far. It spent 2015 taking a very top-down approach, developing a market and putting the right architecture in place to begin issuance. Literally between 2015 and the end of 2016, issuance went from zero to almost US$40 billion.

India is Being Aggressive with Renewable Energy Targets

LEIGH-BELL: India is stepping up as well, with Prime Minister Modi setting an aggressive target of 175 gigawatts of renewable energy by 2030. That was a very strong market signal that helped lead many Indian commercial banks to issue green bonds tied to renewable energy projects. An issuer that stands out is National Thermo Power Corporation (NTPC), India's largest provider of coal-fired electricity, which issued its first green bond on the international stage at about US$500 million. It was incredibly successful. The collateral was their coal assets funding renewable energy projects. The company saw that if it did not change its business model, it would go out of business.

Latin America

LEIGH-BELL: Latin America is another exciting region for green bonds. We've seen some incredible issues coming out of Mexico and Brazil. BNDES, the Brazilian National Development Bank, recently issued its first green bond, which was long awaited and very successful. Brazil also developed its own sustainable energy fund, which aims to buy local green bonds tied to wind and solar ― so Brazil kick-starts everything not only as an issuer, but also by creating a local market.

2017: The Year of Sovereign Green Bonds

LEIGH-BELL: Another key development is that 2017 is being called the "year of sovereigns," or sovereign green bonds. We have already seen a successful issue from Poland, which was the first to hit the market in December 2016, followed by an issue from France that hit about €7 billion and covered a series of different projects crossing over water, energy, and other similar categories. We are now waiting for Nigeria's first green bond, which will be the first to come out of Africa and one that will definitely make headlines.

There are many different things happening across the board and it's a market that is not just European or U.S. driven. The green bonds market is clearly a global market, which Moody's Investors Service expects will reach about US$200 billion in outstanding principal. We are very excited to see the new players coming, the existing players continuing to issue, and the new developments that are happening globally to drive this market forward and creating investment opportunities.

Green Bond Issuance Has Surged

  • Green bond issuance in 2017 is expected to reach $150 billion
  • Issuance has accelerated dramatically since the Green Bond Principles were introduced in 2014
  • Over $80 billion of labeled green bonds were issued in 2016, nearly twice the amount in 2015
  • More than 75% of green bond issuance was independently reviewed in 2016

 

Source: Climate Bonds Initiative, as of 12/31/2016. Not intended to be a forecast of future results, a guarantee of future results or investment advice. Current market conditions may not continue.

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Moats’ Sustainable Competitive Advantages https://www.vaneck.com/blogs/moat-investing/sustainable-competitive-advantages/ VanEck Blog 6/6/2017 12:00:00 AM

This moat investing education series explores the primary sources of economic moats. The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. According to Morningstar Equity Research, there are five key attributes that can give companies economic moats, and which are viewed as sources of sustainable competitive advantages: 1) Network Effect; 2) Intangible Assets; 3) Cost Advantage; 4) Switching Costs; and 5) Efficient Scale. Here we explore the concept of the "Network Effect."

The Network Effect: A Proven Way to Create a Moat

The economic principle of the "Network Effect" has risen to the forefront as our world has grown increasingly digital. It describes the phenomenon of an external effect in the economy, where the value of a product or service increases as the number of its buyers or subscribers expands. When a network effect is in play, each additional customer increases the product's or service's value exponentially. The Internet is a good example; it originally had few users outside the military and research science spheres, but its expanding user base exploded its reach and impact over the past two decades. More recently, Internet companies like Facebook and Google have been labeled "network effect" paragons.

Morningstar posits that a network effect can help a company to increase its advantages over competitors, and is often an important source of a company's economic moat. Morningstar Research explains it as:

  • Network Effect occurs when the value of a company's service increases for both new and existing users as more people use the service. For example, millions of buyers and sellers on eBay give the company an advantage over other online marketplaces. The more sellers there are on eBay, the more likely buyers are to find what they're looking for at a decent price. The more buyers there are, the easier it is to sell things.

The term "critical mass" is often used in connection with the network effect. In game theory, this means that not all game participants need to be convinced for a strategy to succeed, just a very specific portion of them. If this participation threshold is exceeded, the strategy is likely to succeed of its own accord. The network effect works in similar fashion. If the user base for a product or service reaches a critical mass, the network is likely to expand under its own power.

Economic Moat
Five Sources of Sustainable Competitive Advantage

Five Sources of Sustainable Competitive Advantage

Source: The Morningstar® Economic Moat Rating System.

The Network Effect in Action: Four Case Studies of Moat Companies

Within the technology sector, two moat-rated companies standout as beneficiaries of the network effect: Salesforce.com and Microsoft. We also highlight credit card firm Visa from the payments industry and London Stock Exchange Group within the financial exchanges industry.

Salesforce.com (CRM US) currently holds a "wide moat" rating from Morningstar, based on the firm's unique software lineup that offers customer relationship management tools. Salesforce.com is also the largest pure-play software-as-a-service company in the world by many multiples. Writes Morningstar: "We think the combination of the mission-critical applications Salesforce offers, the ubiquity of its products in the enterprise, and increasingly valuable data generated by these applications yields substantial customer switching costs and a network effect that support one of the widest economic moats in software. Between its sales and service cloud offerings, Salesforce has quickly become the dominant vendor in the customer relationship management vertical."

Microsoft (MSFT US) has also earned Morningstar's "wide moat rating." Morningstar believes that Microsoft's massive enterprise footprint creates a network effect around its productivity apps and operating systems. Morningstar also applauds management's cloud-first, mobile-first vision, which is beginning to take hold. As many office workers can attest based on dominant desktop applications: "Microsoft's effective monopolies revolve around its Windows operating system for both client devices and servers and the Office suite of productivity applications. Despite lengthening PC refresh cycles, declining PC shipments, and an influx of new device form factors, Microsoft has maintained upward of 90% PC operating system market share and consistent revenue contributions from both enterprise and consumer Windows desktop deployments."

Visa (V US) is a great example of how the network effect creates powerful competitive advantages for companies in the electronic payments industry. Visa (V US) dominates the global market, controlling a little more than half of all credit card transactions and an even higher portion of debit card activity.1 Morningstar has given Visa a wide moat rating and writes: "As consumer spending around the world grows and digital methods continue to take share from cash, Visa should continue to flourish for years to come as an effective toll booth on global spending. Visa has been coordinating the interaction of banks, consumers, and merchants for decades. Its effective network consists of 16,800 financial institutions, 44 million merchants, and billions of cards issued to customers around the world. This creates a formidable barrier to entry."

London Stock Exchange Group (LSE LN) has undergone a major transformation in the past five years and has evolved from a small to a top player among exchanges. London Stock Exchange Group boasts one of the most attractive business mixes in the exchange industry, and now generate the bulk of its earnings from its clearing businesses and its FTSE Russell index business. According to Morningstar, "With the firm's pivot toward its information services and clearing segments, its sources of competitive advantage stem from intangible assets, network effects, and cost advantage. LCH Clearnet and CC&G, the Group's two clearing companies, enjoy the benefit of network effects, while the information services business has substantial intangible brand assets. Due to the volume and size of London Stock Exchange's operations, the company also enjoys the competitive benefits of spreading its predominantly fixed cost base throughout its numerous IT-heavy segments."

VanEck Vectors® Morningstar Wide Moat ETF (MOAT®) and VanEck Vectors® Morningstar International Moat ETF (MOTI®) provide access to global moat-rated companies, by seeking to track the Morningstar® Wide Moat Focus IndexSM and Morningstar® Global ex-US Moat Focus IndexSM, respectively. Each index measures the overall performance of attractively priced companies with sustainable competitive advantages in their respective markets according to Morningstar's equity research team.

MOAT holdings and learn more about moat investing

MOTI holdings and learn more about moat investing

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Paris Exit Won’t Squash Green Bonds https://www.vaneck.com/blogs/etfs/paris-exit-wont-squash-green-bond/ President Trump announced the U.S. withdrawal from the 2015 Paris Agreement on Climate Change, in which nearly 200 countries have pledged to reduce greenhouse gas emissions to limit global warming.

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VanEck Blog 6/2/2017 11:09:48 AM

President Trump announced the U.S. withdrawal from the 2015 Paris Agreement on Climate Change, in which nearly 200 countries have pledged to reduce greenhouse gas emissions to limit global warming. There is uncertainty about what this decision will mean for future U.S. policy, given an approximately four-year process to withdraw. While Trump did pledge to re-negotiate the terms, he also announced that current commitments will not be implemented and provided no details on how the U.S. will address climate change, if at all. The Agreement may be weakened as a result, but other large countries (including China and India) and the EU have pledged to remain regardless of what the U.S. does. Beyond increased rhetoric in the near term, it is not clear if Trump’s decision will have a long-term impact on addressing climate change. Theoretically, a “better deal” could result from Trump’s promise to re-negotiate the Agreement, but he would need to convince the rest of the world.

What Does this Mean for Green Bonds?

Regardless of the future of the Paris Agreement, the green bonds market continues to have significant growth potential:

  • A Global Market
    The U.S. has thus far had a relatively small presence in the global green bonds market. Europe, and more recently China and other emerging markets, have played a much greater role in the development of the market in terms of formulating policies that support market growth. Even though the U.S. has ceded its position on the issue of climate change, other countries will likely continue to make progress on renewables, electric vehicles, etc., providing a strong project pipeline for green bonds.

  • Corporate America and U.S. States are on Board
    The green bonds market in the U.S. has developed with little support from the federal government. A wide range of companies had urged the administration to remain in the agreement, and corporate issuers like Apple have issued green bonds both to tout their environmental stewardship and in response to investor demand. Much of the growth in the U.S. has been in the municipal market, which is expected to continue to expand given the massive infrastructure investment needed (note that tax-exempt munis are not included in VanEck Vectors® Green Bond ETF’s (GRNB) Index). Twenty states, most notably California, as well as several U.S. cities are pursuing ambitious emissions reductions programs, many in alignment with the goals of the Paris Agreement.

  • Economics Favor Continued Progress
    Electricity generated from coal has declined by more than 30% from 2005 to 2010, and nearly half of all U.S. power plants that were retired since 2006 were powered by coal.1 Solar and wind power costs are becoming more competitive and solar-related jobs in the U.S. grew 25% last year.2 Chinese coal consumption is also declining as China’s central government continues to adopt policies that favor renewables. Green bonds will play a role in financing the continued transition to renewables.

  • Massive Investor Demand
    There is now $22.9 trillion invested globally in strategies that consider ESG (environmental, social, and governance) factors,3 with $8.7 trillion in the U.S (representing 1/5 of all professionally managed AUM, and up +33% since 2014).4 Signatories to the UN PRI (United Nations Principles for Responsible Investment) represent approximately $62 trillion in AUM,5 and signatories to the Paris Green Bond Statement total $10 trillion.6 Investors are increasingly pushing companies to address climate risks. President Trump’s Paris Agreement decision may even may even help mobilize additional capital into environmentally aware strategies such as green bonds.

The U.S. withdrawal from the Paris Agreement is, at the very least, a psychological blow to those concerned about climate change risks. But the ultimate impact remains unclear. It is instructive to recall that the U.S. has actually been a leader in reducing carbon emissions even prior to the Paris Agreement. The Paris Agreement was a major diplomatic achievement, but it is far from perfect (first because its targets are not enforceable and, second, because many see it as inadequate in its current form). The transition to a low carbon economy is already happening both in the U.S. and globally. This transition requires massive amounts of investment, and green bonds will be part of that.

VanEck Vectors Green Bond ETF (GRNB) is the first U.S.-listed fixed income ETF to provide targeted exposure to the fast-growing green bonds market. GRNB was launched on March 3, 2017, and 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.

Watch Video Tackle Climate Change Risk with Green Bonds  

William Sokol, ETF Product Manager, and Justine Leigh-Bell, Director of Market Development at the Climate Bonds Initiative, discuss the growing green bonds market.

Watch Now  

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Muni Market Set for Wave of Cash https://www.vaneck.com/blogs/muni-nation/muni-market-set-for-wave-cash/ As we go into summer reinvestment season, we believe that municipal bond ETFs can work well on two fronts.

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VanEck Blog 5/30/2017 2:05:26 PM

The case for municipal bond ETFs is particularly strong as the market rebounds from the Scylla1 of the post-U.S. presidential election sell-off and enters the potential Charybdis1 of the reinvestment season. Greek mythology sea monsters and whirlpools aside, we believe that investors should look closely at how the muni landscape has changed in our post-election environment.

Six months ago, municipal bonds (along with other fixed income investments) got hammered following the election of Donald Trump as U.S. president. Fears abounded, not just touching, but skewering munis. The greatest post-election fears for the muni market were that: 1) Trump’s big plans for infrastructure revival would create a massive amount of new muni issuance; 2) Trump’s plans to lower income taxes would weaken the tax-exempt sizzle of munis; and finally, 3) Trump’s pro-growth initiatives would light a fire under the country’s economic engine, thus forcing the Federal Reserve to speed up its process of raising rates.

Muni funds, both mutual and ETFs, hemorrhaged money as 2016 came to a close. All was doom and gloom.

Munis Rebound After the Yearend Sell-Off

Fast forward six months and the muni market has regained its footing. The contrast between then and now could not be starker. Today, a new sense of reality has entered the market, which appears to have recovered both from its knee jerk reactions to President Trump’s bluster and from its lows as 2016 drew to a close. The new reality is characterized by an administration that lurches from crisis to crisis, causing great uncertainty among investors. As a result, inflows into muni bond investments have increased as investors seek out safer assets and yield.

As of May 23, the 37 municipal bond ETFs had, year-to-date, garnered $1.6 billion in net new assets, resulting in total assets under management of $26.0 billion, compared to $21.0 billion approximately a year ago.2

Daily Net Flows in Muni ETFs ($M)
January 1 to May 22, 2017

Daily Net Flows in Muni ETFs ($M)

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

Muni Reinvestment Season is Upon Us

With May as the “countdown” month, we are now entering reinvestment season, three consecutive months (June, July, and August) of significant potential reinvestment demand generated by coupons, maturities, and calls. As things currently look, 2017 is going to be historic in terms of just how much cash is going to be returned to investors.

Quoting figures from Citigroup, Bloomberg reports that, over these three months, the state and local government debt market will shrink by $39.5 billion “as bonds mature faster than they are issued”.3 In addition, $44 billion in interest payments will be made to investors, resulting in some $84 billion “available to be reinvested”.4

In June alone, according to Siebert Cisneros Shank & Co., L.L.C.,5 the U.S. municipal bond market is expected to see the largest amount of debt ever maturing in that month in its history. In addition, if calls come in as projected, then June 2017 will beat July 2012 as being the single largest month ever for money going back to investors.

June Municipal Cash Flows Representing Supply and Reinvestment Demand ($B)
June 2010 to June 2017 (Projected)

Municipal Cash Flows Representing Supply and Reinvestment Demand

Source: Siebert Cisneros Shank & Co., L.L.C. Projections are not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

A Perfect Storm Created by a Lack of Supply

Taken together, the levels of cash from maturities, coupons, and calls looking for reinvestment, and the levels of “new” money looking for investment, could have all the makings of a perfect storm. Why? Because on the basis of most forecasts, this summer there may not be enough muni bonds around to satisfy the demand created by this “Cash Tsunami”.3 Year to date approximately $105 billion of new tax-exempt muni bonds have been issued, down approximately 15%.6

What does this means for investors? When it comes to investing, or reinvesting, in muni bonds this summer, the combination of maturities, coupons, and calls, together with robust demand, may result in prospective candidate bonds being more difficult to find.

But how to participate in the benefits of a market that has repudiated the knee jerk reactions of November 2016 and returned to normality – looking both at the fundamentals and the technicals? We believe that municipal bond ETFs can work well on two fronts.

On the one hand, for those for whom reinvesting (perhaps in individual bonds) in a potentially tighter muni market may pose unwanted challenges, a muni ETF can provide efficient and effective asset class exposure. They also offer the added advantages of both professional stewardship and, equally as important, diversification. On the other hand, for those who have additional resources to put to work, the markets are very favorable to munis right now given their perceived safety relative to other fixed income options, and offer attractive tax-free yields.

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The Burning Truth about Tobacco Bonds https://www.vaneck.com/blogs/muni-nation/burning-truth-about-tobacco-bonds/ “Tobacco bonds” are an important constituent group in high yield municipal bond portfolios – especially in some mutual funds or ETFs.

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VanEck Blog 5/23/2017 12:00:00 AM

"Tobacco bonds" are an important constituent group in high yield municipal bond portfolios — especially in some mutual funds or ETFs. Because of their complex structures, their behavior can be counterintuitive. For example, tobacco bonds do not benefit directly from tobacco company profits. However they do provide some important benefits – payments are pledged in perpetuity. In this article we look at tobacco bonds, and the part they can play in high yield municipal bond portfolios.

You may remember a time not too long ago when the tobacco industry's very existence seemed threatened. In the mid-1990s, 46 states, five U.S. territories, and the District of Columbia sued the five largest tobacco manufacturers to recover the financial burden that smoking was placing on their respective public health systems. In 1998, the Master Settlement Agreement (MSA) was arrived at. Under the MSA, the signatories agreed to settle their lawsuits in exchange for the cessation of certain marketing practices on the part of the tobacco companies, in particular the marketing of cigarettes to children.1 Most relevantly for Tobacco Settlement Securitization Bonds (TSSBs), the tobacco companies also agreed to annual payments to the states, U.S. territories, and DC in perpetuity, which would, at least in theory, compensate them for the medical costs associated with caring for those afflicted with smoking-related conditions. Over the intervening years, those payments have averaged $8 billion per year.2

Many states chose to securitize this revenue stream, issuing TSSBs, (often colloquially known as "Tobacco Bonds"). The bonds essentially served as a way to offload the risk of declining MSA payments to investors. As of March 2016, these bonds stood at $27 billion in tax exempt debt outstanding.2

Tobacco Companies are Rolling in Cash

Although fewer Americans are smoking (15.1% nationwide as of 2015, down from 20.9% in 2005),3 tobacco companies' bottom lines have been quite healthy as of late. According to market-research firm Euromonitor International, in 2016 Americans spent more on cigarettes than they did on soda and beer combined — an estimated $93.4 billion. The MSA and additional regulatory requirements may have led to the tobacco industry incurring heavy costs initially, but companies have simply responded by raising prices. Over the past 10 years, the S&P 500 Tobacco Index4 is up 178%, outperforming the S&P 500 Index, which has only risen 58% over the same period.5

What is Driving the TSSB Market?

At first blush, healthier tobacco companies might appear to be good news for TSSBs. However, thanks to the way the MSA is structured, this line of thinking is misleading at best. Tobacco industry payments into the MSA fund are calculated based on a number of factors, including inflation and non-participating manufacturers' market share. Crucially (and unfortunately for TSSB bondholders), settlement payments are calculated not from revenue, but from the actual number of cigarettes shipped, which has been steadily declining by about 3.33% annually since it peaked in 1981.2 For example, if tobacco companies hypothetically raised cigarette prices by 5%, causing volumes to fall by 3%, tobacco companies might see higher profits, but the MSA would receive lower payments as shipments declined. Moreover, MSA payments do not include the proceeds from non-cigarette revenue or shipments: cigars, pipe tobacco, smokeless tobacco, nicotine gum, electronic cigarettes, and other "vaping" products are all excluded from the calculations.

When it comes to the TSSBs themselves, they have a more complex structure than typical municipal bonds. Because payments are pledged in perpetuity, if a tobacco bond defaults (i.e., fails to pay all interest and principal due), it doesn't necessarily mean that bondholders won't get paid, it just may be on a much longer payment schedule.2

Although the bonds were initially issued as investment grade, many have since been downgraded to speculative ratings. Most of the TSSBs were structured under the assumption that cigarette consumption was fairly inelastic and would not react strongly to price increases — a -1.8% average decline rate to 2042 was predicted by IHS.6 Average declines have proven to be significantly higher than this; in 2009 when the federal tax on cigarettes was increased by 158% to $1.01 per pack, the annual decline reached -9.09%, declining a further -6.36% the following year.2 This prompted a sell-off in the tobacco bond market, with speculation that some of these bonds would never see a dollar of revenue.

There are also important technical considerations to take into account when looking at TSSBs. For starters, when compared with the high yield corporate bond market ― which was approximately $1.61 trillion as of April 20167 — the high yield muni market is much smaller, approximately $211 billion.8 Puerto Rico bonds make up roughly $70 billion in par amount outstanding of that market, with TSSBs accounting for about $32 billion in par amount outstanding.9 As Puerto Rico general obligation bonds have gone into default, TSSBs have risen to prominence in portfolios as their most liquid assets when it comes to high yield munis. Of the $32 billion TSSB market, $14 billion becomes callable in the coming months. This raises the prospect that the TSSB market could be significantly diminished in size by refinancing, leaving no large sectors within the muni high yield space where sizable amounts of capital can be deployed.

Breakdown of the High Yield Municipal Bond Market
Par Amount Outstanding
as of 5/17/17

Puerto Rico Representation in the $207 billion Muni High Yield Bond Market Chart

Source: S&P Indices.

Understanding Tobacco Bonds is Complex and Requires Expertise

Unlike the tobacco companies themselves who do better as revenues increase, TSSBs only benefit if cigarette sales volumes increases, which seems a very remote prospect. In the short term, tobacco companies have been able to use higher prices to turn their financial fortunes around, even in the face of heavy taxes and increased regulation. On the other hand, the long term picture is far from rosy for TSSBs, whose reliance on cigarette sales volume is problematic in the context of continuing downward trends in cigarette sales. Thanks to their complex structures, many of which guarantee payments in perpetuity, TSSBs may continue to pay out to bondholders on an extended schedule, even if they go into technical default.

Understanding both tobacco bonds and the constructive role they can play in a high yield municipal bond portfolio is complex. As are the market forces to which they are subject. We believe professional management, knowledge, and experience in this sector of the municipal bond market are of paramount importance. VanEck offers these through its ETFs. Thereby providing investors with an attractive way to access this dynamic part of the market. The ETF structure is relatively low cost, flexible, transparent, and diversified.

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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