Van Eck Blogs https://www.vaneck.com/Templates/PageLayout_Special_rwd.aspx?pageid=12884903011?blogid=2147483856 Insightful, Weekly Commentary on the Municipal Bond Markets 2016-08-23 en-US Brexit Intensifies the Search for Yield within Emerging Markets https://www.vaneck.com/blogs/emerging-markets/brexit-intensifies-search-yield-emerging-markets-august-2016/ Van Eck Blogs 8/17/2016 12:00:00 AM The impact of the U.K.'s Brexit decision in June to withdraw from the European Union continued to influence global markets as the month began. With developed markets government bond yields hitting record lows, investor focus turned away from the potential economic impact of Brexit and toward finding areas of the market where one can still earn sufficient income. According to J.P. Morgan, emerging markets (EM) debt funds appear to have been a significant beneficiary of the U.K.'s decision, attracting almost $14 billion globally in July alone.

Investors Shrug off Geopolitical Risk

As the markets appeared to have digested the near-term impacts of the U.K. referendum, geopolitical risk flared up again on July 15 with news of an attempted coup in Turkey. The immediate market impact of the failed coup attempt was a 4.6% plunge in the Turkish lira, already an underperformer for the year thus far, and significantly wider spreads on Turkish sovereign bonds. The country was already experiencing sluggish economic growth, impacted in part from a collapse in tourism, and weaker confidence may dampen potential improvement. Standard & Poor's responded with a downgrade of Turkey's credit rating to junk status, and Moody's Investors Service placed the country's credit rating on review. Although in general, economic fundamentals for emerging markets countries have turned more positive during the first half of 2016, such has not been the case for Turkey. Turkey's potential migration to sub-investment grade status would also have a fairly significant impact on emerging markets sovereign dollar indices, which have been losing their investment grade bias.

Low Rates Continue, But For How Long?

Meanwhile, the Federal Reserve (the "Fed") was interpreting mixed economic data that was announced throughout the month. Respectable employment reports in the first week of July led to the implied probability of a Fed hike at the December 2016 meeting rising from only 12% at the beginning of the month to 48% by mid-month. Expectations were tempered by the GDP release at month-end showing 1.2% annualized growth, far lower than expected. The U.S. dollar, which had been strengthening through July, pulled back on the news along with expectations of a rate hike this year. However, July's non-farm payrolls, released in the first week of August, surprised heavily on the upside, leading some to once again raise the prospect of at least one rate hike before 2017.

Strong July Performance

The search for yield seemed to outweigh concerns stemming from events in Turkey, the growth impacts of Brexit, and a decline in current oil prices. Emerging markets corporates had a strong July, returning 1.59% largely due to spread tightening. Hard currency sovereigns posted strong July performance of 1.80%, outperforming local currency bonds which returned 0.60% in U.S. dollar terms, with currencies impacting performance negatively. Despite the compression in yields, spreads on hard currency sovereigns remain slightly wider versus their 10-year historical average.

Unsurprisingly, Turkey was an underperformer in both local currency (-4.76% in USD) and hard currency (-3.01%). Oil producing countries such as Colombia, Russia, and Mexico were also laggards, as oil prices fell back towards $40 per barrel through the month. The impact of this decline has so far been limited, but sustained lower prices may pose a potential risk. South Africa was a notable outperformer during the month (+2.36% on hard currency bonds; +8.07% USD-return on local currency bonds). Although economic fundamentals remain sluggish, hope for political change in South Africa has boosted asset prices this year.

Record Inflows

Investors' renewed interest in emerging markets debt amid the yield drought in developed markets is evidenced by the surge in flows this year that accelerated in July. According to J.P. Morgan, during the month, global flows amounted to an estimated $13.7 billion, almost 60% of year-to-date flows of $23.3 billion. Inflows of $4.7 billion toward the end of the month exceeded the previous weekly record set earlier in the month. Almost all flows have been into hard currency strategies, with local currency flows slightly positive at $0.7 billion.

Capital inflows, attractive yields in emerging markets (as shown below), and continued low and negative rates in developed markets continue to provide an extremely supportive backdrop for emerging markets bonds.

Yield Comparison: 10-Year Local Currency Sovereign Bonds (%)
as of July 31, 2016

 
Source: FactSet.

 

Download EM Debt Observer PDF with Fund specific information and performance  

RELATED FUNDS  

VanEck VectorsTM ETFs  
CBON ChinaAMC China Bond ETF
EMAG Emerging Markets Aggregate Bond ETF
EMLC J.P. Morgan EM Local Currency Bond ETF
HYEM Emerging Markets High Yield Bond ETF
IGEM IGEM EM Investment Grade + BB Rated USD Sovereign Bond ETF
IHY International High Yield Bond ETF
 
VanEck Funds  
EMBAX Unconstrained Emerging Markets Bond Fund: Class A

Important Disclosures and Index Definitions  

Source of all data: FactSet; J.P. Morgan; and BofA Merill Lynch. All data as of 7/31/2016. Emerging markets corporates represented by BofA Merrill Lynch US Emerging Markets Liquid Corporate Plus Index, hard currency sovereigns represented by J.P. Morgan EMBI Global Diversified Index; local currency sovereign bonds represented by J.P. Morgan GBI-EM Global Diversified Index; country returns derived from the respective hard currency sovereign index or local currency sovereign bond index.

BofA Merrill Lynch US Emerging Markets Liquid Corporate Plus Index (EMCL) tracks the US dollar denominated non-government debt of EM.

J.P. Morgan EMBI Global Diversified Index is comprised of U.S. dollar denominated Brady bonds, Eurobonds, and traded loans issued by emerging markets sovereign and quasi-sovereign entities. The index weighting methodology limits the weight of countries with larger debt stocks.

J.P. Morgan GBI-EM Global Diversified Index tracks local currency denominated EM government debt. The index weighting methodology limits the weight of countries with larger debt stocks.

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

Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this commentary.

Debt securities carry interest rate and credit risk. Bonds and bond funds will decrease in value as interest rates rise. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. Securities may be subject to call risk, which may result in having to reinvest the proceeds at lower interest rates, resulting in a decline in income. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Changes in currency exchange rates may negatively impact the Fund's return. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability.

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

 

]]>
Hone In On Income Not Financials https://www.vaneck.com/blogs/etfs/hone-in-on-income-not-financials-august-2016/ Preferred securities tend to be in demand, as seen more recently, given both their attractive yield and risk/return characteristics. However, excluding the preferreds financials sector this year so far, in particular, would have been a prudent move.

]]>
Van Eck Blogs 8/16/2016 12:00:00 AM

Authored by Meredith Larson, Product Manager, VanEck VectorsTM ETFs

As the search for yield continues, preferred securities have become a beacon of potential income. However, a large proportion of the preferreds universe, approximately two-thirds, is made up of traditional financial companies, including banks.1 VanEck VectorsTM Preferred Securities ex Financials ETF (PFXF) offers the yield potential of preferreds, but without the excessive financials sector exposure.

Competitive Yield Potential

Excluding traditional financials from the preferreds universe has not meant giving up the yield potential. PFXF's underlying index, Wells Fargo® Hybrid and Preferred Securities ex Financials Index yielded 6.1%, as compared to 5.7% from the broad-based Wells Fargo® Hybrid and Preferred Securities Aggregate Index, as of July 31, 2016.2

Attractive Risk/Return Tradeoff

While the impact on yield has been negligible, the two-thirds concentration in financial preferreds has had a significant influence on returns. This concentration may not always be a negative factor, but is one worth considering. For example, the 2008/2009 credit crisis clearly showed the market that when financials sell off, they can do so significantly. In addition, excluding traditional financials allows for greater participation in other sectors, such as energy, utilities, and consumer staples. As shown in the chart below, avoiding financial preferreds contributed to over 5% outperformance year to date.3

Annualized Standard Deviation vs. Annualized Return
01/01/2016 to 7/29/2016

Source: FactSet, Bloomberg. Data as of July 31, 2016. Past performance is no guarantee of future performance. Index performance is not indicative of Fund performance. Indices are not securities in which investments can be made. See index descriptions and additional disclosure below.

Excluding traditional financial companies does not mean excluding the attractive income-producing Real Estate Investment Trusts (REITs) segment.4 In fact, REITs, along with other exchange-listed real estate companies, will be removed from the Global Industry Classification Standard (GICS®)5 Financials sector and placed in the new Real Estate sector at the end of August.6 We believe that this separate sector classification indicates REITs have become a more robust segment of the market. One positive impact may be increased institutional demand for REITs, as investment managers tend to keep pace with their benchmarks' sector weightings.

PFXF helps limit the unnecessary concentration of financial preferred securities without sacrificing yield potential. Investors who target preferred securities for the yield potential, can do so without piling on to their existing financial sector exposure that may be found with current fixed income and equity investments.

Click here to view standardized performance and yields for PFXF.

]]>
Quality Can Be Rewarding in Emerging Markets Bonds https://www.vaneck.com/blogs/etfs/quality-rewarding-emerging-markets-bonds-august-2016/ Van Eck Blogs 8/12/2016 12:00:00 AM

Authored by William Sokol, Product Manager, ETFs

The term "emerging markets" is very broad. Countries within this category can be at different stages in their development and employ varying economic policies. Emerging economies can be affected differently by external influences such as global commodity prices and monetary policies, as well as idiosyncratic factors. While some investors view emerging markets bonds as equivalents to high yield bonds, about half of the broad U.S. dollar-denominated sovereign market (as represented by the J.P. Morgan EMBI Global Diversified Index) is rated investment grade. It can be instructive to break down this bond universe by credit rating, examine how each rating category has performed historically, and what they can offer investors.

Higher Yields May Reflect Higher Risks

From a yield perspective, lower rated bonds tend to provide higher yields versus those with higher ratings. This should not be surprising since a higher yield is reflective of a higher spread which incorporates, among other factors, a higher risk of default. As shown in the chart below, investment grade emerging markets bonds had an average yield of 3.91% as of July 31, 2016 compared to a yield of 6.95% on bonds with high yield ratings. Breaking that down further, it’s clear that the yield pickup becomes increasingly large between the BB-rated and B-rated categories.

Emerging Markets USD Sovereign Bonds: Average Yield by Credit Rating Category
as of 7/31/2016

Source: J.P. Morgan as of 7/31/2016. Ratings represent J.P. Morgan Composite Ratings, which are a blend of a security's Moody's, S&P, and Fitch ratings. If all three agencies rate the security, the middle rating is taken. If only two agencies rate a security, the lower rating is taken. If only one agency rates a security, that rating is used. This composite is not intended to be a credit opinion. Securities are categorized as Investment Grade if two out of three ratings from Moody's, S&P and Fitch are Baa3/BBB-/BBB- or higher. If a security has two ratings, both must be Baa3/BBB-/BBB- or higher. Otherwise, securities are categorized as High Yield.

Venezuela provides a good example of the potential returns on bonds issued by a lower rated country, with an average yield of approximately 26% as of July 31, 2016.* However, these distressed levels reflect severe economic and political challenges the country is currently facing. Therefore, the very real possibility of default puts the ability of realizing this substantial yield in question.

On the other hand, yields on Venezuela bonds peaked at over 40% in February 2016, resulting in a total return of 68% since reaching those levels through the end of July.* Many investors, however, may be uncomfortable with the uncertainty and volatility associated with distressed countries like Venezuela.

Quality May Provide Attractive Risk-Adjusted Returns

It is also useful to analyze the historical returns of the different credit rating categories within emerging markets bonds. Historical returns incorporate the market's assessment of changes in credit quality, which can often precede changes in a country's credit rating.

As shown in the table below, the higher quality categories generally exhibited lower annualized total returns over the past ten years, with substantially lower volatility. One notable exception is the BB-rated category which outperformed B-rated bonds, providing risk adjusted returns comparable to A-rated bonds.

JP Morgan and Morningstar Rating Category 7-31-2016Source: J.P. Morgan and Morningstar as of 7/31/2016. High quality EM Bonds represented by a blend of 80% of the investment grade subset of the J.P. Morgan EMBI Global Diversified Index, and 20% of the BB rated subset of the J.P. Morgan EMBI Global Diversified Index. Broad EM Sovereigns represented by the J.P. Morgan EMBI Global Diversified Index.

Overall, investors who maintained exposure to investment grade emerging markets sovereign bonds, with an allocation to BB-rated bonds or 20%, would have earned 7.55% over the past ten years versus 7.83% on the broader emerging markets sovereign index, with lower volatility and higher risk-adjusted returns as measured by the Sharpe ratio.

For investors seeking to enhance yield while balancing risks, a focus on high quality emerging markets sovereign bonds may be an attractive addition to a bond portfolio. VanEck VectorsTM EM Investment Grade + BB Rated USD Sovereign Bond ETF (IGEM) provides access to the higher rated subset of the broad U.S. dollar-denominated emerging markets sovereign bond universe.

]]>
Performance Drivers Come in all Shapes and Sizes https://www.vaneck.com/blogs/moat-investing/performance-drivers-come-all-shapes-sizes-august-2016/ Van Eck Blogs 8/11/2016 12:00:00 AM

For the Month Ending June 31, 2016

Performance Overview

The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) outpaced the S&P 500® Index (5.62% vs. 3.69%) in July and continued its impressive 2016 year-to-date performance (19.11% vs. 7.66%). International moats lagged the broad international markets, albeit slightly. Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) lagging the MSCI All Country World Index ex USA (4.81% vs. 4.95%).

U.S. Domestic Moats: Healthcare and Hogs

MWMFTR's strong relative performance was driven by several companies in various sectors. Financials standout State Street Corporation (STT US) benefited from strong second quarter earnings driven in part by effective cost cutting measures. Healthcare was the top performing sector in MWMFTR led by Biogen, Inc. (BIIB US) which saw a unique combination of strong earnings results and its CEO's resignation fueling speculation that the firm was suiting prospective buyers. Other strong performing companies included Polaris Industries, Inc. (PII US) and Harley-Davidson, Inc. (HOG US). Conversely, the materials sector struggled in July driven primarily by Compass Minerals International, Inc. (CMP US) which suffered from weak fertilizer sales and price pressure on its deicing salt business.

International Moats: Beamers and Blackjack

BMW Group (BMW GR) surged in July despite lagging Mercedes Benz in first half 2016 global luxury auto sales. BMW GR posted strong profits for the quarter and reaffirmed 2016 forecasts for sales and profit growth. Another theme for MGEUMFUN in July was the resurgence of Macau-based gaming companies. Sands China Ltd. (1928 HK), Wynn Macau Ltd. (1128 HK), and MGM China Holdings Ltd. (2282 HK) all contributed significantly to MGEUMFUN's performance. Several companies struggled in July, namely Cameco Corp (CCO CN), one of two energy companies in the index. Several moat-rated companies from the United Kingdom rebounded in post-Brexit July. However, Lloyds Banking Group plc (LLOY GB) and Petrofac Ltd. (PFC LN) – the other energy company in the index – struggled and were among the bottom performers in MGEUMFUN for the month.



(%) Month Ending 7/31/16

Domestic Equity Markets

International Equity Markets

(%) As of 7/31/16

Domestic Equity Markets

International Equity Markets

(%) Month Ending 7/31/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
State Street Corporation
STT US
22.00
Polaris Industries Inc.
PII US
20.78
Biogen Inc.
BIIB US
19.89
Harley-Davidson, Inc.
HOG US
16.82
Varian Medical Systems, Inc.
VAR US 15.21

Bottom 5 Index Performers
Constituent Ticker Total Return
Walt Disney Company
DIS US
-1.20
Twenty-First Century Fox, Inc. Class A
FOXA US
-1.52
Gilead Sciences, Inc.
GILD US
-4.74
Compass Minerals International, Inc.
CMP US
-6.20
Stericycle, Inc.
SRCL US
-13.30

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
Bayerische Motoren Werke AG BMW GR 17.88
Kering SA KER FP 17.58
AMP Limited AMP AU 14.93
Sands China Ltd. 1928 HK 14.04
Wynn Macau Ltd. 1128 HK 13.08

Bottom 5 Index Performers
Constituent Ticker Total Return
SoftBank Group Corp. 9984 JP -1.38
Lloyds Banking Group plc LLOY LN -2.35
Roche Holding Ltd Genusssch. ROG VX -2.58
Petrofac Limited PFC LN -4.58
Cameco Corporation CCO CN -12.41

View MOTI's current constituents

As of 6/17/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Polaris Inds Inc. PII US
AmerisourceBergen Corp. ABC US
Tiffany & Co. TIF US
Stericycle Inc. SRCL US
VF Corp. VFC US
Wells Fargo & Co. WFC US
Berkshire Hathaway Class B BRK.B US
Twenty-First Century Fox Inx. FOXA US
Harley-Davidson Inc. HOG US
United Technologies Corp. UTX US
Starbucks Corp. SBUX US
Microsoft Corp. MSFT US
Emerson Electric Corp. EMR US
American Express Co. AXP US
Salesforce.com CRM US
Time Warner inc. TWX US
Lilly Eli & Co. LLY US
Western Union Co. WU US
Compass Minerals Intl. CMP US
Cerner Corp. CERN US
Amazon.com Inc. AMZN US

Index Deletions
Deleted Constituent Ticker
St. Jude Medical STJ 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
Mgm China Holdings Ltd. China
Bayerische Motoren Werke BMW Germany
National Australia Bank Australia
Crown Resorts Ltd. Australia
Platinum Asset Management Ltd. Australia
Westpac Banking Corp. Australia
Carnival Plc. United Kingdom
Wynn Macau Ltd. Hong Kong
Wipro Ltd. India
Linde Ag. Germany
Kering Ord. France
Tata Motors Ltd. India
Amp Ltd. Australia
Commonwealth Bank of Australia Australia
Power Financial Corp. Canada
London Stock Exchange Group United Kingdom
United Overseas Bank Ltd. Singapore
Nordea Bank Ab. Sweden
Svenska Gandelsbanken Ab. Sweden
Safran Sa. France
Softbank Group Corp. Japan
Computershare Ltd. Australia
Seven & I Holdings Co. Ltd. Japan
Petrofac Ltd. United Kingdom
Capitaland Mall Trust United Singapore

Index Deletions
Deleted Constituent Country
Bank of Nova Scotia Halifax Canada
Toronto-Dominion Bank Canada
CI Financial Corp Canada
HSBC Holdings Plc. United Kingdom
Centrica United Kingdom
UBS Group Ag. Switzerland
Novartis Ag. Switzerland
Swatch Group. AG. B Switzerland
Richemont, Cie Financiere A Br. Switzerland
Loof Holdings Ltd. Australia
Ainsworth Game Technology Ltd. Australia
China Merchants Bank Co. Ltd. China
China Construction Bank Corp. China
BOC Hong Kong Holdings Ltd. China
China Mobile Ltd. China
China Telecom Corporation Ltd. China
China State Construction International Holdings Ltd. China
Dongfeng Motor Group Co. China
Credit Agricole SA. France
Technip SA. France
Mobile Telesystems PJSC Russia
Embraer SA. Brazil
Grifols SA. Spain
Sun Hung Kai Properties Ltd. Hong Kong
Contact Energy Ltd. New Zealand

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



]]>
A Unique Way to Access Physical Gold as Rally Strengthens https://www.vaneck.com/blogs/etfs/access-physical-gold-rally-strenghtens-august-2016/ Van Eck Blogs 8/10/2016 12:00:00 AM

Authored by Brandon Rakszawski, Product Manager, VanEck VectorsTM ETFs

Gold has enjoyed a strong run so far in 2016. With this rally, gold has once again reasserted its importance as both a "store of value" and a "safe haven asset".1 Through the ages, gold has remained one of the most highly valued commodities for cultures across the globe. It is especially prized as a way to pass on and preserve wealth from one generation to the next.

The current strength of the gold market is revealed in the 2016 numbers: YTD (through July 31, 2016), gold bullion has gained $282 per ounce, or 26.6%. Gold mining shares are up 122.9% as measured by the NYSE Arca Gold Miners Index (GDMNTR).2 This rally has left many investors questioning whether there is still any upside potential for either physical bullion or gold mining shares.

Recent Gold Market Drivers (2010-2016)

Recent Gold Market Drivers (2010-2016)

Source: Bloomberg, VanEck. Data as of June 30, 2016.

Will Gold Bull Market Continue?

We believe that, given the uncertainty of the current global economy, gold will continue to be an attractive option for investors seeking protection against systemic financial risks. Gold has historically generated positive returns in periods of economic stress and political/economic upheaval. Portfolio Manager and Gold Strategist Joe Foster addresses the multiple risks currently assaulting global markets in his recent blog post, Investment Demand Sustaining Gold's Run. These risks include overly accommodating central bank policies, economic malaise, currency turbulence, low equity returns, and continuing geopolitical turmoil. Notable tailwinds helping gold in 2016 have been a weaker U.S. dollar, no imminent threat of interest rate hikes, and rising commodities prices.

For many investors, the question at the moment is not whether to invest in gold, but rather how best to include it in their investment portfolios. Common wisdom has been that holding physical gold can be cumbersome and costly. Other ways to own gold without physically holding it include gold receipts, and shares of mutual funds/ETFs that provide access to gold bullion and/or gold mining equity shares. But some of the options tied to physical gold are subject to "paper gold" criticisms which assert that they do not have direct ownership of the underlying physical gold.

OUNZ: The Gold ETF That Delivers

VanEck offers a suite of gold funds, including an actively managed mutual fund and three specialty gold ETFs. VanEck Merk Gold Trust (NYSE Arca: OUNZ), one of these ETFs, provides investors with a convenient and cost-efficient way to buy and hold gold through an exchange traded product together with the option to take delivery of physical gold.

No other gold ETF offers this patented redemption feature. OUNZ's structure is considered ground breaking. It allows any investor to redeem shares, even in small amounts, in exchange for physical gold. For a fee, an investor can accept delivery of as little as one ounce of gold. The fee will vary depending on what type of gold coin or bar an investor wants to accept, and is in keeping with accepted gold redemption and handling fees.

Investor Comfort in Having Access to Physical Gold

In turbulent markets, like the ones we are experiencing today, OUNZ provides investors with the comfort of knowing that they can take delivery of their gold when they wish, but until they do, trade it with the ease of an exchange-traded product.

]]>
Investment Demand Sustaining Gold's Run https://www.vaneck.com/blogs/gold-and-precious-metals/investment-demand-sustaining-golds-run-august-2016/ Van Eck Blogs 8/9/2016 12:00:00 AM

For the month ending July 31, 2016

Gold's Resilience Continues in July

Following the June 23 Brexit vote when the U.K. chose to withdraw from the European Union, bond yields fell to record lows and gold rallied to two-year highs, reaching $1,375 per ounce on July 6. In the U.S., subsequent strong economic results in manufacturing, retail sales, and housing created U.S. dollar strength and gold consolidated its Brexit gains, declining to $1,310 per ounce on July 21. However, as was the case throughout the post-crisis expansion, good economic news doesn't last long and the month ended with disappointing durable goods and pending home sales reports, along with second quarter GDP growth of just 1.2%. The U.S. dollar reversed course and the gold market demonstrated its resilience, advancing to end the month with a $28.80 per ounce (2.2%) gain to finish at $1,351 per ounce.

Silver is fulfilling its role as a leveraged proxy for gold with a new post-Brexit high of $21.14 per ounce and a monthly gain of 8.7%. The buying in silver was led by China with heavy volumes on both the Shanghai futures and gold exchanges.

As we have pointed out repeatedly this year, and discussed in detail in our June update, gold companies are well managed, and gold stocks provide leverage to gold since valuations remain attractive. Therefore it is no surprise that stocks enjoyed another surge higher in July. The NYSE Arca Gold Miners Index1 (GDMNTR) gained 10.1% and the MVIS Global Junior Gold Miners Index2 (MVGDXJTR) gained 16.8%. Strong equity gains are typical in the early stages of a gold bull market.

Low Rates Force Investors to Take on More Risk

We are beginning to witness, once again, the unintended consequences of monetary policies that have remained too easy for too long. Because of extremely low rates, bonds no longer fulfill their historic purpose of capital preservation and portfolio security. A Wall Street Journal article by Timothy W. Martin published on May 31 shows that the expected return of a portfolio made up entirely of bonds was 7.5% in 1995. To achieve the same return in 2015, a portfolio would have needed to hold only 12.5% bonds and 87.5% in stocks, real estate, and private equity. This portfolio allocation would have carried nearly triple the volatility of the bond-only portfolio.

Ineffective Monetary Policies Creating Potential Future Issues

Policy makers seem to be focused on solutions to previous problems without realizing that excesses are going to create additional issues. For example, an odd thing happened after Brexit – stocks ignored the risks Brexit posed to the global economy and the S&P 500®3 advanced to all-time highs. Markets rallied in the belief that more central bank stimulus would be forthcoming. Bonds also moved to all-time highs. The traditional negative correlation between bonds and risk assets, including stocks, no longer applies thanks to meddling by central banks that has caused asset price inflation (or bubbles) in both these asset classes.

Negative yielding sovereign debt in Japan and Europe totals over $13 trillion now, according to a recent Bank of America Merrill Lynch analysis. We believe U.S. rates are not far behind; from a firsthand experience, I recently received a CD rollover notice from my local megabank branch with a yield of only 3 basis points (0.03%). Negative yields lock in a capital loss if held to maturity. The only way to come out ahead is when negative yields are accompanied by deflation in excess of the yield rate. However, deflation comes with its own drawbacks, namely, bank failures, job loss, and depression. Without deflation, there is a limit to how much further yields can fall and for how long they stay in place before savers abandon the banking system to hold cash, despite the inconvenience that option brings. Or perhaps as an alternative, they look to hold gold since it exists outside of financial authority, cannot be a target of financial repression, and carries virtually no counterparty risk.

As central banks buy up more bonds and more bonds move into negative yields, investors search among a smaller pool of substitutes and trades get crowded for higher risk alternatives. According to the Wall Street Journal, higher prices for stocks, bonds, and real estate have caused net wealth to swell to over 500% of national income in the U.S. This has happened only twice historically – just before the tech bust and just before the housing bust. By definition, black swan4 events are nearly impossible to predict. However, with the imbalances and extremes present in the markets today, we must assume that the odds are increasing for an unforeseen calamity. The further bond prices rise (and rates fall) the greater the risk is to bond values from even moderate increases in inflation and interest rates. One possible crisis scenario might involve higher than expected consumer price inflation that crushes negative yielding bonds, causing liquidity to dry up as investors rush for the exits and sell assets to cover losses.

Mervyn King, Governor of the Bank of England from 2003 to 2013, was interviewed in the World Gold Council's June edition of Gold Investor and said, "The risk is that we just muddle through with a prolonged period of very low growth. The longer that goes on, the more output we will have lost in the interim. And in the long run, it makes another crisis more likely because, if everyone is relying on monetary policy and it isn't the answer, we won't get back to a new equilibrium. We do need to make that jump at some point so the question is do we get there as a result of active, conscious policy decisions and cooperation between countries or will it only happen as the side-effect of another crisis."

Unlike 2008, Investors in 2016 are Acting Proactively

There was heavy investment demand for gold following the 2008 financial crisis. We are seeing a similar level of investment demand in 2016, as many are preparing their portfolios for the next possible crisis. Gold and gold shares declined with other markets in the massive selloff in 2008. However, both gold and gold equities bottomed in October 2008 and then made a strong recovery. The action in the current gold markets indicates that investors have become more proactive, buying gold as a hedge against future turmoil. This suggests that gold is now more broadly recognized as a hedge against financial stress. With this recognition, if there is another crash, perhaps gold will not see the same selling pressure as the broader markets.

With Selling Pressure Removed, Normal Gold Demand Trends May Reemerge

Historically, there is a seasonal pattern to gold prices dependent on physical demand trends. Often, there is weakness in the summer when jewelry demand, primarily from China and India, is low and trading volumes decline. Seasonal strength often occurs from August to January, beginning with the Indian festival season and ending with Chinese New Year. Gold demand from China has been weak and from India has been even weaker. The Indian Finance Ministry reported 218 tonnes of imports in the first half, a 52% decline from the first half of 2015. This is to be expected as Indian, and Asian demand overall, usually declines when the price is rising, as gold investors in these regions tend to wait for price weakness to restock. Changes to Indian demand may be coming though. The Indian monsoons have been good this year which boosts crop output and the ability of rural farmers to potentially increase their gold savings, and the Diwali festival begins October 30. In addition to the macro drivers, seasonal strength may provide a boost to gold prices as the New Year approaches. This summer, any seasonal price weakness has been offset by gold's appeal following the extraordinary Brexit rally which has delayed the return of the normal gold market pattern. This pattern has been absent for several years due to the relentless selling pressure during the gold bear market. However, shorting gold has been a very risky bet in 2016. Now that the gold bears are on the run, perhaps seasonality will again influence the market.

Download Commentary PDF with Fund specific information and performance


]]>
Munis: Market Views for the Second Half https://www.vaneck.com/blogs/muni-nation/muni-market-views-second-half-august-2016/ Jim shares his views, in a recent video, on why he expects municipal bond performance to continue to overcome negative headlines for the remainder of 2016.

]]>
Van Eck Blogs 8/9/2016 12:00:00 AM

The municipal bond marketplace has had a strong first six months of the year, undeterred by mixed economic signals and a Federal Reserve seemly stuck in a quagmire. Regardless of these issues, Jim believes the remainder of 2016 is likely to be similar to the first half, with attractive performance and strong demand, despite the dual distractions of Puerto Rico and the U.S. Presidential elections.

Watch Video Muni Market Views for Second Half of 2016

Jim Colby, Portfolio Manager, discusses his outlook on the second half of the year and explains why munis may to continue to perform well despite negative headlines.

Watch Now | Video Transcript

VIDEO TRANSCRIPT: Muni Market Views for Second Half of 2016

TOM BUTCHER: The municipal bond market has had a pretty good six months so far this year, despite negative headlines. What does the rest of the year hold for it?

JIM COLBY: The municipal marketplace has had an unusually strong first six months of the year, based upon what we anticipated way back in December 2015. The outlook for the remainder of the year is probably similar to what we have just experienced. We've come through six months during which every move by the Federal Reserve has been dissected. The wording of their statements, that is, in terms of whether they're going to raise rates at all this year.

Some aspects of the economy are strong and some are not, which doesn’t empower the Federal Reserve to make any moves anytime soon. Even if they do, I suggest that the outcome of the remaining six months of this year are going to be very similar to the beginning of 2016. Munis have had strong performance with continued strong demand and a modestly raised level of new issuance coming from states and municipalities that hasn’t overwhelmed demand in the marketplace. I think that performance will continue to be good.

During the first half of the year, general municipal bond performance was positive. It was up over 4%. That’s general market product. In high yield, the performance was better than that: up over 7%. We probably are not going to experience moments akin to those that occurred in the first six months of the year, e.g., Brexit and the passing of the Puerto Rico bill that staved off the inevitable default and a worrisome outcome similar to that of Detroit two years ago. Such elements notwithstanding, the market put in a solid performance and I think the remainder of the year also stands to potentially come out very well for munis.

BUTCHER: What do these strong inflows tell us?

COLBY: The inflows tell us a couple of things. First of all, investors are confident, or at the very least, in terms of the performance of the municipal marketplace, investors are confident that the returns and tax-free income they receive will be as good as, if not nominally better than, what they would receive elsewhere. Don't forget that in some of the strongest economies of Europe, there are negative interest rates. Even foreign investors, such as corporate, banking, and insurance institutions, are looking at the United States as a place to gain positive returns and positive cash flow. They've come to munis and recognize that munis comprise a very strong investment class. They enjoy positive returns. Foreign investors don't benefit from a tax exemption, but nevertheless, they may book some positive income. That has accrued to the strong demand for munis so far this year.

BUTCHER: Can we go back to Puerto Rico? Can you say some more about what's going on and how it's affecting the markets now?

COLBY: As many people know, Puerto Rico has defaulted on a good portion of their obligations, and what led up to the end of the second quarter of this year was an effort by Congress to pass a bill to somehow provide support to the struggling commonwealth. The bill got signed by Obama on June 30 and what it did was stay and prevent lawsuits from encroaching on the commonwealth and destroying the commonwealth's ability to operate independently.

However, the impact is severe, which means that investors holding commonwealth obligations are not going to get paid until the control board that was promised in the bill outlines a series of economic activities to enable the commonwealth to regain financial footing. Puerto Rico has been an enormous issuer of bonds in the municipal marketplace.

What's remarkable about all these events leading up to June 30 is that the marketplace as a whole has been able to set aside concerns for the outcome of Puerto Rico. Yes, it will have some negative impact upon some fund companies and holders of the commonwealth’s debt. For the most part though, the market has continued to perform outstandingly well. I think that over the next two or three years, until these issues get sorted out on behalf of the commonwealth, the municipal market will continue to operate and function very well without concern for one of its biggest issuers no longer being involved on a day-to-day basis.

BUTCHER: Thank you very much.

]]>
Investment Outlook: Commodities and Emerging Markets Bonds Shine https://www.vaneck.com/blogs/market-insights/investment-outlook-commodities-emerging-markets-bond-shine-august-2016/ Van Eck Blogs 8/8/2016 12:00:00 AM

August 8, 2016

Watch Video Investment Outlook: Commodities and Emerging Markets Bonds Shine  

Jan van Eck, CEO, shares his investment outlook.

Watch Now  


Commodities Rally Still Has Legs

TOM BUTCHER: As we enter the third quarter, how would you address the concerns of investors who fear they may have missed the commodities rally?

JAN VAN ECK: I think what we've seen so far in 2016 is investors are very cautious; the majority of inflows have gone into fixed income funds. After commodities bottomed in February, oil prices nearly doubled. Many investors worried that they had missed the investment opportunity entirely. It is indeed a question on many investors' minds.

We believe it would be strange if the commodities rally were to last only five months. It has been about five months since the bottom of commodity prices. If you consider past commodity bull markets, you'll find they have tended to last much longer. Additionally, commodity stocks as a percentage of the overall market are very low. Lastly, I think it is worth examining interest rate hiking cycles. We are in a very slow-motion cycle right now. Commodities is one of the best-performing asset classes during these cycles.

Only the Second Inning

BUTCHER: Could you elaborate?

VAN ECK: We had a very long bull market in the last ten years. It lasted almost 80 months. Most of the bull markets in commodities have tended to last around 30 months.

Commodity Bull Market Cycles

Source: VanEck; Bloomberg. Data as of June 30, 2016.

We're only five months into this one. The average commodity bull market lasts six times as long as what we've experienced thus far. To use a baseball analogy, we're in the second inning perhaps.

Valuations Suggest More Room for Energy to Climb

VAN ECK: Energy as a percentage of the overall S&P 500® Index is still near its lows of about 6%-7%. Energy stocks are still very inexpensive relative to what they have been as a percentage of the S&P 500® Index in other markets.

Past Patterns in Monetary Policy Bode Well

VAN ECK: My point about where we are in terms of interest rate hiking cycles may be controversial. The current cycle is slow and there is considerable debt. Slow growth is rampant in the global economic environment. In the prior eight interest rate hiking cycles, only once did commodities prices decline. The average return over all eight was an annualized 20%. The Fed raised rates last December and since then, despite a small lag, commodities and gold have risen. These developments fit the historical pattern.

Diversification Is Paramount

BUTCHER: What other opportunities might fixed income investors consider at this time?

VAN ECK: I believe the story is very different now from what it was at the beginning of the year. Six months ago credit was cheap. Corporate bonds were very cheap. Interest rates were high because investors were very concerned about defaults in energy bonds, as well as in retail and other areas. Those concerns seem to have abated. High yield has performed well this year but we don't see any screaming buys or outrageous risks.

What we do see is, as central banks have continued to buy bonds, interest rates around the world have hit multi-century lows. In that context, we think it makes sense for investors to diversify as prudently as they can.

Opportunities in Emerging Markets Debt

VAN ECK: Having said that, emerging markets debt is an area of interest to us in 2016. Interest rates are negative in Europe and Japan but they aren't negative in the emerging markets. Because emerging markets currencies are affected by commodity prices, there is likely less downside risk in emerging markets debt if commodities have bottomed. These factors make emerging markets debt more interesting to us now than six months ago. Economically speaking, emerging markets are on a different cycle from the U.S. or Europe, the developed markets. It's a diversified income stream that we consider pretty attractive to investors.

BUTCHER: Within the emerging markets, the individual countries are on different cycles as well.

Variety in Emerging Markets Debt Investments

VAN ECK: We've been working with emerging markets debt as a firm for 20 years. Our ETF lineup is the broadest in that asset class. The reason we have focused in this way is emerging markets debt is a huge asset class with myriad opportunities given an investor's risk and return tolerance. We have an investment grade offering, a high yield offering, dollar-based emerging markets debt, local currency debt, and an all-in-one too. Regardless of what you're looking for, I believe you can match opportunities in the asset class to your risk-return profile.

BUTCHER: Thank you very much.

]]>
Fallen Angels Continue to Outpace the Pack https://www.vaneck.com/blogs/etfs/fallen-angels-outpace-pack-august-2016/ Van Eck Blogs 8/2/2016 12:00:00 AM

Authored by Meredith Larson, Product Manager, ETFs

Fallen Angel Bonds Outperform Broad High Yield in the Second Quarter and YTD

Signature sector biases and higher credit quality contributed to divergent returns between fallen angels (+19.3%) and the broad high yield bond market (+12.1%) year to date as of July 31, 2016.1 Performance was fairly muted in July (+2.7%), as the 5-year U.S. Treasury yield ended July near where it began (+1 basis point) and WTI Crude fell $6.7 per barrel.2 However, fallen angel bonds posted a remarkable +9.1% return in the second quarter, as the 5-year U.S. Treasury yield fell 19 basis points and WTI Crude rose over $11 per barrel, and outperformed the broad high yield bond market (+5.9%) by 3.2%.3

Sector Bias, Credit Quality, and Bond Buybacks

Fallen angels have maintained their sector biases year to date, being meaningfully overweight the basic industry and energy sectors and underweight the healthcare sector, which positively contributed to outperformance relative to the broad high yield bond market. In addition, fallen angels' higher average credit quality and some notable tender offer activity positively contributed to outperformance. Read more about fallen angels' 2016 bond buybacks. Conversely, fallen angels' overweight in the banking, utility, and insurance sectors negatively contributed to relative performance versus the broad high yield bond market.

Basic Industry and Energy Sectors Drive Fallen Angel Outperformance YTD
Year-to-Date Top/Bottom Three Sector Performance Attribution

BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA) vs. BofA Merrill Lynch US High Yield Index (H0A0)

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

Fallen Angel Investment Thesis

The investment thesis behind fallen angels is based on the premise that performance can be driven by sector themes, higher average credit quality, and the tendency of fallen angels to be oversold prior to entering the H0FA Index. The strong performance of fallen angels so far in 2016 is consistent with this thesis, and can be attributed, in particular, to the favorable commodities environment post the 2014/15 oil price collapse. Many fallen angels entered the H0FA Index at discounted prices over the past year and a half, mainly from the basic industry and energy sectors. These sectors are now meaningfully overweight, but have a higher average credit quality constituency, relative to the broad high yield bond market. This scenario is a prime example of the fallen angel thesis, and may help support how this subset of high yield bonds offers a sufficient combination of price appreciation and yield for a potentially optimal high yield bond allocation over the long term.

ANGL Outperformed Majority of Active Peers

VanEck VectorsTM Fallen Angel High Yield Bond ETF (ANGL), which seeks to track the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), placed in the first percentile relative to actively managed high yield bond funds over multiple time horizons since its April 2012 inception.4

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) vs. Morningstar Active High Yield Bond Universe

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL)

Source: Morningstar. Data as of June 30, 2016.
This chart is for illustrative purposes only. The performance data quoted represents past performance. Past performance is not a guarantee of future results. Performance information for the Fund reflects temporary waivers of expenses and/or fees. Had the Fund incurred all expenses, investment returns would have been reduced. Investment return and value of the shares of the Fund will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Performance current to the most recent month end is available by calling 800.826.2333 or on vaneck.com. VanEck Vectors Fallen Angel High Yield Bond ETF commenced on April 10, 2012. An investor cannot invest directly in an index. The results assume that no cash was added to or assets withdrawn from the Index. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown. The actively managed high yield bond category is represented by the Morningstar Open End Funds – U.S. – High Yield Bond category. See index descriptions below.

VanEck Vectors Fallen Angel High Yield Bond ETF received a three-year and overall five-star rating from Morningstar, as of June 30, 2016.5 ANGL was rated against 653 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 »

]]>
Russian Resilience: An Economy Driven by Pragmatism and Consistency https://www.vaneck.com/blogs/etfs/russian-resilience-economy-driven-pragmatism-consistency-august-2016/ If history has taught us one thing about Russia, it is that its resilience should not be underestimated. In 2016, Russian markets have staged a comeback, rising 8.49% in local currency (ruble) terms and 24.78% in U.S. dollar terms.

]]>
Van Eck Blogs 8/1/2016 12:00:00 AM

Authored by James Duffy, Product Manager, VanEck VectorsTM ETFs

If history has taught us one thing about Russia, it is that its resilience should not be underestimated. Its legendary winters have forged a determination in its people that, when tested, particularly by foreigners, sees them dig in for a long hard fight. After the end of the siege at Leningrad (January 1944), Russians proudly proclaimed "Troy fell, Rome fell, Leningrad did not fall." The length: 900 days. The toll: 670,000 to 1,500,000 people.1

Given the country's recent history it should come as no surprise that Russian markets are staging a comeback.

Russia in Recovery

The Russian economy may have contracted in the first quarter (1.2% growth year-on-year), but it was less than expected.2 During the same period, the economy benefited both from higher oil prices and a stabilization in the ruble's exchange rate. In June, stating steady inflation as a reason, the Bank of Russia lowered its key interest rate by 50 basis points to 10.5%.3 At the half year mark, Russia's stock market had risen 8.49% in local currency (ruble) terms for the six-month period and 24.78% in U.S. dollar terms.4 As of July 25, the MVISTM Russia Index (MVRSXTR) was up 23.21% YTD; at the same time, small-caps as measured by the MVIS Russia Small-cap Index (MVRSXJTR) soared 40.47% in the first half of the year.

2016 YTD Total Returns 12/31/2015 – 7/25/2016
MVIS Russia Index (MVRSXTR) versus MVIS Russia Small-Cap Index (MVRSXJTR)

Source: MVIS and VanEck.

Pragmatism and Consistency

Why does Russia remain resilient? On the economic front at least, two characteristics stand out: pragmatism and consistency.

A good illustration of Russia's pragmatism is the reaction of Minister of Finance Anton Siluanov at the beginning of March, to Moody's Investors Service placing Russia on review for a downgrade. Assigning no blame, Siluanov noted that the rating agency's move indicated "…the need to adapt the budget system to the new reality in the commodities market."5

When it comes to consistency, you need to look no further than the Central Bank of Russia. Following the imposition of sanctions, the central bank continued to opt for a more orthodox policy response than was initially expected. This has allowed Russia's currency to act as a shock-absorber, and it has worked. The ruble sold off almost 75% in 2015 and inflation at the end of this year could be as low as 7%. Russia continues to pay its debts despite having its market access severely restricted under sanctions and as a result the government's external debt has approximately halved in the past two years (falling to $31.5 billion).4

"Russian Markets Did Not Fail"

Russians may someday proclaim, Communism failed, Western Sanctions failed, but Russian markets did not fail. The Russian equity markets can be accessed through VanEck Vectors Russia ETF (RSX) and VanEck Vectors Russia Small-Cap ETF (RSXJ).

]]>
Energy Resilient, Gold Shines in 2Q https://www.vaneck.com/blogs/natural-resources/energy-resilient-gold-shines-july-2016/ Van Eck Blogs 7/21/2016 12:00:00 AM

2Q Hard Assets Strategy Review and Positioning

In the second quarter of 2016, the hard assets strategy's positions in Gold and Energy were, in particular, significant contributors to positive performance, with Gold leading Energy. Within the Energy sector, positive performance stemmed mainly from the Oil & Gas Exploration & Production (E&P) sub-industry; within this sector, only the Oil & Gas Refining & Marketing sub-industry detracted from performance, but only minimally. Only three other sub-industries detracted from performance during the second quarter, and, likewise minimally: Precious Metals and Minerals; Electrical Components & Equipment; and Fertilizers & Agricultural Chemicals.

2Q Performance Contributors

The top five contributing companies in 2Q came from Gold and the Energy sectors. The top two contributors were gold mining companies. The fact that gold miners continued to perform so well in 2Q provides, we believe, further confirmation that they came into 2016 considerably healthier than they had been for quite a while and truly deserved a valuation re-rating.

Agnico Eagle Mines1 benefited from strong operational performance, a continued focus on cost reduction, and engineering-related restructuring. Barrick Gold2 benefited from the restructuring it has been undertaking and its leverage to gold prices.

Within the Energy sector, Oil & Gas Exploration & Production company Newfield Exploration3 benefited from successful drilling results in central Oklahoma's STACK play; Oil & Gas Equipment & Services company Halliburton4 rose on the back of firmer oil prices and an uptick in drilling; and, Oil & Gas Exploration & Production company Cimarex Energy5 benefited from successful drilling in the Delaware Basin.

2Q Performance Detractors

The hard assets strategy's five biggest individual performance detractors came from the Fertilizers & Agricultural Chemicals and Diversified Metals & Mining sub-industries, and the Energy sector. CF Industries Holdings6 was hit by concerns around both Chinese production (which continued unabated) and the value of the Renminbi, in addition to concerns around nitrogen prices. Glencore7 suffered from profit taking after a successful first quarter and a moderation in key commodity prices. Valero Energy (sold by the strategy during the quarter) suffered from the rebound in crude oil prices. Oil & Gas Storage & Transportation companies Scorpio Tankers8 and Golar LNG9 suffered, respectively, with lower tanker rates and a softening in the global liquefied natural gas (LNG) market.

Brexit Decision Seen as a Defining Moment of 2Q

Despite the market spending most of the three-month period under the twin shadows and uncertainties of Brexit and the U.S. presidential elections, sentiment remained positive. Overall the environment was positive for commodities, particularly for gold. The most significant macroeconomic factor influencing commodities markets was the continued extraordinary accommodation extended by central banks around the world. In addition, supply and demand, particularly for oil and gas, continued to rebalance.

For many, the Brexit referendum on June 23, the result of which was the U.K. voting to reject continued membership of the European Union (EU), was seen as a defining moment. Perhaps somewhat surprisingly, Brexit's immediate effect was somewhat less than cataclysmic, and commodities have remained surprisingly resilient. It remains to be seen, however, just what the long-term effects of the vote will be.

Demand for Crude Oil Remains Strong

Despite lackluster prospects for economic growth in both Europe and the U.S., the demand for crude oil and, in particular, gasoline remained remarkably strong. The U.S. is now consuming almost 10 million barrels a day. The country's gasoline demand exceeds the unrefined crude oil demand of every country in the world except China.

Concerns that a flood of Iranian crude oil could swamp the market continued to prove unfounded. Albeit reasonably strong, supply from the country was, in no way enough to offset supply disruptions in the market, for exogenous reasons, during the quarter. These included pipeline outages in Nigeria, wild fires in Canada that hit oil sands production particularly hard, reduced supply from Libya on the back of persistent political uncertainty, and supply from Venezuela reduced still further because of both the country's dire economic circumstances and continued drilling challenges.

Industrial Metals Companies Continued to Restructure

Base metal companies continued to restructure during the quarter, cleaning up balance sheets, streamlining operations, and focusing more on profitability. In addition, they continued to sell off assets and reduce debt levels. On the back of the finding by the U.S. Department of Commerce that government subsidies and dumping were occurring, tariffs were imposed on imports of steel into the U.S., particularly those from China. U.S. steel stocks benefited accordingly.

Hard Assets Strategy Prudently Positioned for Brexit Impact

The U.K.'s historic Brexit decision on June 23 was clearly one of the most important events during the quarter. Currently our London-listed and GBP-denominated exposure represents around 4% of our strategy's exposure. We believe that we were prudently positioned going into the vote given a gold equities exposure of approximately 19%, one of the highest allocations since the inception of our hard assets strategy. Furthermore, the high-quality, companies (i.e., strong balance sheets and long-term structural growth stories) in our other sectors are likely to prove relatively resilient during the period of uncertainty that will follow the vote.

While global economic growth trends were put at risk by the result of the vote, we continue to believe that demand for commodities will likely remain solid in the face of moderate GDP progression. Further output constraint in crude, base metals, and some bulk materials could possibly be exacerbated by this murky outlook, but this may in turn tighten commodity markets and support prices. Given that the U.S. Federal Reserve is now not likely to raise interest rates, this should continue to put pressure on the U.S. dollar which may be stimulating to emerging markets and commodity demand.

Room for Tempered Optimism

While we still believe there is room for optimism, we also believe that this should still remain tempered when it comes to supply and demand rebalancing in the oil and gas sector. It remains, perhaps, too easy to fall into the trap of thinking that a 10%, or even a 50%, increase in a U.S. onshore oil rig count of fewer than 350 can restore the balance, and to forget that, to plumb its current depths, the rig count has actually dropped from its highs by a total of some 1,300 rigs. It is going to take an increase of considerably more than 150-200 rigs to bring back any growth in production. Maybe not all 1,300 rigs, but perhaps at least half of them. And for crude to be anywhere from $50 to $60 a barrel.

Inaugural VanEck Energy Renaissance Conference 2016 a Success

Finally, we held our inaugural VanEck Energy Renaissance Conference 2016, in Houston at the end of May to which we invited a number of leading CEOs from the space. One of the main themes we explored during the day was "Surviving and Thriving through the Current Downturn," with special reference to the oil and gas industry here in the U.S. The very fact that we could hold the conference and discuss this provides proof that there are such companies.

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

Download Commentary PDF with Fund specific information and performance »


]]>
Emerging Markets End Quarter on High Note https://www.vaneck.com/blogs/emerging-markets/emerging-markets-end-quarter-high-note-july-2016/ Emerging markets equities, and our investment strategy, performed relatively well in 2Q, despite the challenges of Brexit, negative bond yields, a sharp appreciation in the Japanese yen, and concerns about the rise of “populist politics”.

]]>
Van Eck Blogs 7/21/2016 12:00:00 AM Macro Turbulence Persisted in 2Q

At the end of first quarter of 2016, we observed: "This quarter has been one of more twists and turns in macro factors than we can, perhaps, remember." Three months later, as macro-driven turbulence continued, this statement still resonates. Markets have been challenged by the U.K.'s Brexit decision to leave the European Union (EU), negative bond yields, a sharp appreciation in the Japanese yen, and concerns about the rise of "populist politics". However, despite these various continuing risk events, there have been a number of factors which have contributed to the outperformance of the emerging markets asset class for the quarter and year-to-date.

One of the most important changes is that the U.S. dollar appears to have discovered a level of equilibrium, after a period of sharp appreciation. A strengthening U.S. dollar is not helpful for emerging markets. It negatively affects earnings, domestic liquidity, and translation of returns to U.S.-based investors. Commodities have rebounded across the board this year. Our strategy eschews investment in cyclically driven stocks, so while this is not helpful for relative performance (as discussed below), it tends to be positive for the asset class as a whole.

Large-Caps Outperformed Small-Caps Again

In emerging markets equities, the second quarter of 2016 witnessed some of the same dynamics and factors that dominated in 1Q. In particular, return dispersions between sectors and countries remained large, and large-caps continued to outperform small-caps. Commodities-related sectors and countries continued to rally (although less so than in the first quarter). Both the MSCI China and MSCI India Indices' performances improved in the second quarter, but have certainly not matched the year-to-date performance of their Latin America (LATAM) counterparts. It is worth noting that, so far this year, despite all the negative events and headlines, the MSCI EM Index is ahead of most major global indices, a marked contrast to the last five years. Gratifyingly, despite all this turmoil and confusion, and the outperformance of commodities-related sectors, our strategy was able to outperform its Index in the second quarter, clawing back a significant part of the first quarter underperformance, and continuing its long run outperformance of the asset class.

LATAM Outpaced Asia, Led by Brazil

On a country level, in the second quarter, LATAM emerging markets countries continued to outperform Asian emerging markets countries, led by Brazil, Peru, and Argentina. Brazil is still enjoying a post-impeachment run. Confidence in the economy has improved recently and Brazil's GDP forecast for 2017 has generally been upgraded and inflation forecasts cut. However, Brazil, as a commodity exporter, will continue to be sensitive to negative headlines regarding global growth. In addition, the structural issues relating to its fiscal accounts and lack of infrastructure will not be easily solved.

Peru performed well in the second quarter, following a positive presidential election cycle. The country also benefited from MSCI's decision to keep it in the MSCI EM Index. Argentina equities are still enjoying the country's return to global markets. Poland and Turkey were among the worst performers during the second quarter. Both countries have significant political issues to cope with, while suffering from the possible consequences of the Brexit vote.

Concerns about Capital Outflows from China Declined

The MSCI China Index was up slightly in the second quarter. Concern surrounding China's capital outflows has lessened, but there is still net depreciation pressure on the yuan (CNY). In some ways, mild, engineered depreciation versus a basket of currencies, while keeping a lid on capital outflow pressures, represents a positive outcome for China. Market concern has tended to focus more on the rapid increase in leverage that we have seen in China since the global financial crisis. While we do agree that there is a significant issue that will necessitate some hard decisions, we think that there are very significant differences in the nature of that debt and the management of the economy should prevent a systemic crisis in the foreseeable future.

As a reminder, our investments in China are firmly focused on the better, more sustainable parts of the Chinese equity story. We find areas such as tourism, education, healthcare, and e-commerce to be some of the healthier and more predictable places to makes investments in China. This contrasts with the more cyclical parts of China, involving commodities, heavy industry, and property, which may nevertheless have their "moment in the sun" from time to time.

Brexit Likely to Impact Eastern Europe

A major, unexpected event in the second quarter for world markets and currencies was, of course, the Brexit vote in the U.K. The direct, first order implications for emerging markets are relatively small. But the long term ramifications may be very significant. The uncertainty surrounding the future relationship that the U.K. has with the rest of Europe, and, indeed, the nature of European integration going forward, is unlikely to be helpful for either U.K. or European growth.

Eastern European countries, especially Poland and Hungary, will be impacted more directly, as they are recipients of European Union (EU) funds (the U.K. is a major contributor), remittances (many Eastern Europeans work in the U.K.), and trade. As for the rest of the emerging markets, the impact will likely be in the form of slower growth in Europe and the U.K., potentially affecting major trading partners and commodities exporters in the emerging markets.

2Q'16 Emerging Markets Equity Strategy Review and Positioning

On a country level, positioning in China was the main detractor from the emerging markets equity strategy's performance, followed by positioning in Russia and Hong Kong. On the positive side, India, Peru, and South Korea gave the strategy's relative performance a boost. On a sector level, industrials and information technology hurt the Fund's relative performance while financials added value.

2Q Performance Contributors

India

In India, Yes Bank Limited1 and Axis Bank2 both made the list. Yes Bank, a high quality, private sector bank, benefited from both improving loan growth and widening lending spreads. This led to significantly positive results, driven also by the Bank's focus on retail, as opposed to commercial, business opportunities. In addition, as it becomes clear that the current government is unlikely to recapitalize the overly indebted state-owned banking sector, the well-managed private banks are well positioned to take considerable market share. Axis Bank is exposed to many of the above trends, but its performance in this quarter was driven as much by the recovery in the share price after the initial poor reaction from investors to its conservative provisioning announcement in the first quarter.

China

Long-term portfolio position Chinese internet company, Tencent Holdings3 reported very strong first quarter revenue and profit numbers, and continued to be driven by its core games business. Upgrades to earnings and an increase in the share price quickly followed. It remains a core holding.

Peru

In Peru, in addition to its improving asset quality, consistent performance, and asset growth, financial holding company Credicorp Ltd.4 benefited from an uptick in the commodities markets, together with the turnaround in the Peruvian market, during the six month period. This followed a second half in 2015 when uncertainty as to whether the country would be reclassified by MSCI Indexers weighed heavily on its stocks and the recent resolution of political uncertainty with the election of Pedro Pablo Kuczynski as the country's president.

Brazil

Smiles SA,5 a Brazilian company, performed commendably in the first half of 2016. The company provides value-added operations to "air mile" programs in Latin America. The company has benefited both from being a Brazilian real-based stock, and from the country's recent recovery.

2Q Performance Detractors

China

Chinese internet companies JD.com6 and Baidu Inc.7 were among the strategy's worst performers for the quarter. JD.com, an e-commerce company, disclosed some superficially negative data points regarding top-line sales which caused further multiple contraction. However, we believe the valuations do not fully reflect the considerable growth opportunities in the e-commerce sector in China and we are inclined to remain patient. Baidu suffered from regulatory issues surrounding advertising in the healthcare sector. The company was forced to cut back on revenue from this lucrative sector until resolution becomes clearer, hurting earnings.

Having been forced to change its business model, Hong Kong-listed, China-based Boer Power Holdings Ltd.,8 which provides electrical distribution solutions, faced increased business risk in our opinion. The company's leverage increased as it took on higher levels of accounts receivable. Although we have reduced our exposure to the company until the outlook becomes more predictable, we believe that it will continue to be a beneficiary of the development of a smarter grid in China.

CAR Inc.,9 based in Hong Kong, is the largest auto rental company in China and provides vehicles to U-Car, a partner providing "Uber-like" chauffeured car services in China. The issues around this company, and its recent poor performance, center on uncertainty surrounding the regulatory environment that has led U-Car to scale back its investment and, thus, use fewer CAR Inc. vehicles. The management remains focused, however, on the very valuable core rental business.

Taiwan

Catcher Technology10 is one of the leaders in the high-end supply chain to the smart phone industry. The shares and earnings were both softer for the quarter in line with reduced sales in the sector overall and concerns over its metal casing that was supposed to be used in future smartphones.

Many Areas of Superior, Sustained Growth

We are constructive on the continuing outperformance of emerging markets in a global context. We continue to implement our philosophy of structural growth at a reasonable price. We find that there are many areas of superior, sustained growth that are essentially non-cyclical in nature and that should provide reliable opportunities for well-managed companies to exploit. In some places, demographics are very positive, and consumer preferences and labor skills continue to evolve quickly. Other countries are taking seriously the structural reforms and skills investment necessary to advance their economies from the middle income level.

Services and Financial Sectors Stand Out

We continue to be very excited by the services and financial sectors. Within these, we are interested in participating in companies where strong, innovative management teams are able to capitalize on dynamic change and extract real value, including e-commerce, internet services, healthcare, travel, and education, and very specific, consumer-focused, financial services business models.

Taking pockets of reliable structural growth in the emerging markets as a starting point, and then adding to these the expectation of a continued benign U.S. dollar environment, we believe should lead to decent relative returns in this growth challenged world. Volatility in commodities may help, or hurt, our relative performance at the margin, quarter by quarter. But, over the medium- to longer-term horizon, we continue to believe we are able to access superior non-cyclical, repeatable, risk-adjusted returns for our investors.

New Discoveries Merit Investments

We continue to discover, and invest in, great companies with strong competitive advantages. As we always point out, for periods of time, countries and sectors may drift in and out of favor with investors and cause us bouts of underperformance. However, great companies – regardless of their home country – usually have strong cash flows to invest consistently in their businesses, and compound long-term structural trends despite short-term periods of underperformance against either a benchmark or cyclical sectors. We remain disciplined during these periods and add to positions where valuations guide us, but we do not chase short-term trends or short-term shifts in investor preference.

Download Commentary PDF with Fund specific information and performance  

For a complete listing of the holdings in VanEck Emerging Markets Fund (the "Fund") as of 6/30/16, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

 

Post Disclosure  

1Yes Bank Limited represented 2.94% of the Fund's net assets as of 6/30/16.  

2Axis Bank represented 2.12% of the Fund's net assets as of 6/30/16.

3Tencent Holdings represented 3.11% of the Fund's net assets as of 6/30/16.

4Credicorp Ltd. represented 2.38% of the Fund's net assets as of 6/30/16.

5Smiles SA represented 1.10% of the Fund's net assets as of 6/30/16.

6JD.com represented 2.92% of the Fund's net assets as of 6/30/16.

7Baidu Inc. represented 1.75% of the Fund's net assets as of 6/30/16.

8China-based Boer Power Holdings Ltd. represented 0.30% of the Fund's net assets as of 6/30/16.

9CAR Inc. represented 1.19% of the Fund's net assets as of 6/30/16.

10Catcher Technology represented 1.41% of the Fund's net assets as of 6/30/16.  

All indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the strategy. An index’s performance is not illustrative of the strategy’s performance. Indices are not securities in which investments can be made. The Morgan Stanley Capital International (MSCI) Emerging Markets Index captures large- and mid-cap representation across 23 Emerging Markets (EM) countries. With 836 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across 23 Emerging Markets (EM) countries. With 2,628 constituents, the index covers approximately 99% of the free float-adjusted market capitalization in each country. MSCI All Country World Index (ACWI) captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries. With 2,483 constituents, the index covers approximately 85% of the global investable equity opportunity set.

IMPORTANT DISCLOSURE

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

The views and opinions expressed are those of the speakers and are current as of the posting date. Videos and commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results.

Please note that Van Eck Securities Corporation offers investment portfolios that invest in the asset class(es) mentioned in this commentary. The Emerging Markets Equity strategy is subject to the risks associated with its investments in emerging markets securities, which tend to be more volatile and less liquid than securities traded in developed countries. The Emerging Markets Equity strategy's investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation. The Emerging Markets Equity strategy is subject to risks associated with investments in derivatives, illiquid securities, and small or mid-cap companies. The Emerging Markets Equity strategy is also subject to inflation risk, market risk, non-diversification risk, and leverage risk. Please see the prospectus and summary prospectus for information on these and other risk considerations.

You can obtain more specific information on VanEck strategies by visiting Investment Strategies.

Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of any investment strategy carefully before investing. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation.

]]>
Rate Expectations Drive Emerging Markets Debt Rally https://www.vaneck.com/blogs/emerging-markets/rate-expectations-drive-emerging-markets-debt-rally-july-2016/ Van Eck Blogs 7/20/2016 12:00:00 AM Global emerging markets ("EM") debt, both hard and local currency, rebounded strongly in June after a significant retracement in May. One of the main drivers behind the resumption of the EM debt rally was yet another shift in interest rate expectations, following a very weak U.S. employment release on June 3. The U.K. Brexit vote on June 23 was an even more significant event, one that placed a very large exclamation point on the renewed expectations for "lower for longer."

Negative Rates Intensify the Hunt for Yield

As unpredictable as the Brexit decision was, the fact that the resulting selloff in risk markets reversed so quickly, yet rates continued to fall, was equally difficult to forecast. The net result has been that by early July, some $11.5 trillion in bonds were trading at negative rates, with 58% of the Barclays US Aggregate Bond Index1 trading below 1%. Thus, the hunt for yield continued as aggressively as ever. Given the impact that the more hawkish tone struck by the Federal Open Market Committee members had on debt markets in May, the rapidity of the shift back to extremely dovish expectations is somewhat unsettling and leaves one wondering how quickly expectations can swing back the other way.

Current Conditions Support Emerging Markets Debt

In the near term, the precarious position of European banks – a situation that has persisted but has moved in and out of focus over the last four years – in combination with a variety of risks to global growth prospects will likely keep the hawks at bay. While global growth statistics remain within muted expectations, EM debt and equity could remain the beneficiaries of additional capital flows for some time. The inflows to EM debt funds to date in 2016 are quite small relative to what left EM debt funds in 2015.

Under current conditions, we expect to see an acceleration of inflows during the second half of the year. Valuations, positive real rates of interest, and EM central banks with (conventional) policy flexibility are all supportive of the case for EM. The risks are many, including further growth deceleration and a reversal in the commodity price recovery. On the flip side, a rate shock, as unlikely as it may seem at the moment, could cause a sharp reversal in flows to various debt asset classes, including EM.

Brexit's Impact Hardest for Central and Eastern Europe

Within emerging markets, the Brexit impact, predictably, was felt most poignantly in Central and Eastern Europe. These countries have the highest dependence on Britain and the EU for trade. Romania, Poland, and Hungary were the laggards in the local currency space, while high beta countries such as Brazil, South Africa, and Colombia posted total returns (from both local interest rates and foreign currency movements) of between 10% and 15% in June alone. Despite recovering 1.8% in June, Mexico's local debt is the only major market with a negative return year-to-date return (-2%) for the first half of 2016, all due to persistent weakness in the peso. In hard currency markets, Venezuelan debt continued to recover, returning more than 12% in June. Brazilian, South African, and Colombian sovereign and corporate U.S. dollar-denominated bonds were among the top performers as well, particularly sovereign bonds with returns in excess of 5%. That being said, overall in June, credit spreads on hard currency EM debt were only marginally tighter (virtually unchanged in the corporate markets). Duration and the U.S. Treasury rally were very much the drivers of return.

10-Year Local Currency Sovereign Bond Yields (%)
as of June 30, 2016

Source: FactSet.

 

Download EM Debt Monitor PDF with Fund specific information and performance  

RELATED FUNDS

VanEck Vectors ETFs
CBON ChinaAMC China Bond ETF
EMAG Emerging Markets Aggregate Bond ETF
EMLC J.P. Morgan EM Local Currency Bond ETF
HYEM Emerging Markets High Yield Bond ETF
IGEM IGEM EM Investment Grade + BB Rated USD Sovereign Bond ETF
IHY International High Yield Bond ETF
 
VanEck Funds
EMBAX Unconstrained Emerging Markets Bond Fund: Class A

Post Disclosure  

1The Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

All data as of 6/30/2016. Source of all data: FactSet, Barclays, and J.P. Morgan.

Duration is a measure of the sensitivity of the price of a fixed-income investment to a change in interest rates.

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

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

Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this commentary. Debt securities carry interest rate and credit risk. Bonds and bond funds will decrease in value as interest rates rise. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. Securities may be subject to call risk, which may result in having to reinvest the proceeds at lower interest rates, resulting in a decline in income. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Changes in currency exchange rates may negatively impact the Fund's return. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability.

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

 

]]>
Munis: High Drama on the High Wire https://www.vaneck.com/blogs/muni-nation/high-drama-high-wire-july-2016/ Thus far in 2016, the municipal bond market has continued to thrive despite headline drama. Jim Colby explains why munis have expertly navigated this "high wire" walk.

]]>
Van Eck Blogs 7/19/2016 12:00:00 AM For months, if not for years, the municipal market has been walking the "high wire" of confidence and performance, all while certain high profile issuers (Stockton, Detroit, and Puerto Rico) and external events filled the headlines with decidedly unflattering commentary and predictions. It seems that friends and fans of the muni asset class need to be reminded that their tax-free investment class continued, predominantly, to perform well in 2016. I believe that this, substantially, remains the case.

Positive Muni Performance in the First Half of 2016

As shown below, munis continued to offer attractive returns relative to other assets: the performance of the broad Barclays Municipal Bond Index was a positive 4.33%, and muni high yields were also strong with a 7.98% return, as measured by the Barclays High-Yield Municipal Bond Index. Munis outperformed Treasuries, investment grade corporates, and U.S. equities, all while providing the added benefit of federally tax-free yields. During this period, issuers, perhaps emboldened by the near historically low rate environment, came to market with over $200 billion in new bonds - a higher volume than a year ago.

Munis Offered Attractive Returns in the First Half of 2016
January 1, 2016 – June 30, 2016

Sources: Barclays and Bloomberg as of June 30, 2016. Treasuries are represented by the Barclays U.S. Treasury Index; investment-grade corporates by the Barclays US 1-5 Year Corporate Index; high yield corporates by the Barclays US Corporate High Yield Index; broad municipal bonds by the Barclays Municipal Bond Index; and high yield municipal bonds by the Barclays High Yield Municipal Index. Index performance shown is not representative of the performance of any specific investment. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

Munis Continue to Thrive Amid Headline Drama

The backdrop drama narrative, which provided a springboard for the market to improve in the first half of 2016, centered on the uneven economic performance of our economy, which resulted in a hesitant Federal Reserve initiating no rate increases. Further, worldwide instability brought on by acts of terrorism and a most surprising Brexit vote in the United Kingdom, led to sharp rallies in U.S. Treasuries, with municipals following this lead.

At the same time, the drama that played out in the hallways of San Juan and Washington, which resulted in the signing of the PROMESA legislation (the Puerto Rico Oversight, Management, and Economic Stability Act) effectively creating a "stay" in politico-economic activities on the island, set the stage for a default of significant proportions of the Commonwealth's 15 issuers of tax-exempt securities. Yet the muni market continues (as I have suggested in prior posts) to avert its eyes from these recent negative events to generally deliver both reliable income streams and returns that compare favorably to many other asset classes. This might be the most underappreciated feature of municipals that investors seem to rediscover over and over again.

Munis Retain Their Popular Profile

The high wire walk that the muni market seems to have expertly navigated is likely to continue for the foreseeable future, in my opinion. With some sovereign yields in Europe in negative territory and foreign interest in munis stimulating demand, the asset class overall has retained its popular profile and is focused on the other end of the wire without concern for the roiling waters below.

 

RELATED ETFs
HYD High-Yield Municipal Index ETF
ITM Intermediate Municipal Index ETF
MLN Long Municipal Index ETF
PRB Pre-Refunded Municipal Index ETF
SHYD Short High-Yield Municipal Index ETF
SMB Short Municipal Index ETF
XMPT CEF Municipal Income ETF

 

Post Specific Disclosures

The Barclays High Yield Municipal Index covers the high yield portion of the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year. The Barclays US 1-5 Year Corporate Index includes US dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between 1 and 5 years. The Barclays US Corporate High Yield Index represents the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded but, Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of October 1, 2009) are also included. The index includes corporate sectors. The corporate sectors are Industrial, Utility, and Finance, encompassing both US and non-US Corporations. The Barclays US Treasury Index represents the US Treasury component of the US Government index. The S&P 500® Index consists of 500 widely held common stocks covering industrial, utility, financial, and transportation sector; as an Index, it is unmanaged and is not a security in which investments can be made.

]]>
Investment Grade Emerging Markets Bonds: Higher Yield, Balanced Risk https://www.vaneck.com/blogs/etfs/investment-grade-emerging-markets-bond-higher-yield-balanced-risk-july-2016/ Emerging markets bonds is an asset class where investors often look for higher yields, and this year they have attracted special interest.

]]>
Van Eck Blogs 7/18/2016 12:00:00 AM

Authored by William Sokol, Product Manager, ETFs

Given the current exceptionally low interest rates in the U.S. and negative rates in other developed markets, investors are increasingly searching beyond global core fixed income asset classes for higher yields.

Emerging markets (EM) bonds is one asset class where investors often look for higher yields, and this year they have attracted special interest. Several tailwinds have helped the asset class thus far in 2016, including continued low interest rates in the U.S., a rebound in commodity prices, and expectations of relatively higher emerging markets economic growth versus developed economies. Furthermore, valuations were considered by many to be attractive at the beginning of 2016, following a few challenging years for the asset class.

Investors Should Weigh Higher Yields with Emerging Markets Risks

As with any investment in the emerging markets, investors must balance the additional yield which can be achieved with emerging markets bonds with incremental risks. These are primarily political and market related risks that can increase volatility. In addition, recent downgrades by credit rating agencies reflect increased credit risk in the broad emerging markets universe.

But emerging markets represent a diverse group of countries, and individually they carry varying levels of risk. Because of this, income-seeking investors may find opportunities by isolating the higher quality segment that exists within the emerging markets universe.

A potential solution for credit-conscious investors is to focus on the higher quality, investment grade subset of the broad U.S. dollar-denominated emerging markets universe, which accounts for about 54% of the market.1 This segment provides higher yields versus U.S. corporate investment grade bonds, allowing for additional income potential without additional credit risks. Also, U.S.-based investors limit the currency risk associated with emerging market local currencies, by investing in hard currency bonds.

A Compelling Yield Comparison
as of June 30, 2016

 
Source: IG EM Sovereigns represented by the investment grade subset of the J.P. Morgan EMBI Global Diversified Index. IG U.S. Corporates represented by the Barclays U.S. Corporate Bond Index. Global Core Bonds represented by the Barclays Global Aggregate Bond Index.

Investors may also want to consider a small allocation to BB rated emerging markets countries. These higher-rated high yield issuers provide incremental yield while also allowing investors to maintain exposure to "fallen angel" countries (whose credit ratings have dropped below investment grade) such as Russia and Brazil, which are among the largest emerging markets issuers. Along with the potential yield pickup, improving credit fundamentals may contribute positively to returns over time.

Complement Your Global Bond Portfolio

Adding U.S. dollar-denominated investment grade emerging markets bonds to a global bond portfolio can add yield and diversification, without a significant increase in credit and currency risk.

VanEck VectorsTM EM Investment Grade + BB Rated USD Sovereign Bond ETF ( IGEM) (the "Fund") provides access to the higher rated subset of the broad U.S. dollar-denominated emerging markets sovereign bond universe.

]]>
Gold Bull Market Gains Momentum https://www.vaneck.com/blogs/gold-and-precious-metals/gold-bull-market-gains-momentum-july-2016/ Several macroeconomic surprises raised global financial risks in June, and propelled gold. On June 24, the day following the historic Brexit decision, gold reached a new two-year high of $1,359 per ounce. Gold finished up 8.8% in June.

]]>
Van Eck Blogs 7/14/2016 12:00:00 AM

For the month ending June 30, 2016

Brexit Decision Boosts Gold

In June, several macroeconomic surprises around the globe raised financial risks, and propelled gold to new, near-term highs. On June 24, the day following the historic Brexit decision, gold soared to new two-year highs, reaching an intraday peak of $1,359 per ounce. Gold finished the month at $1,322.20 for a $106.87 (8.8%) per ounce gain. As has been the case all year, gold stocks reacted strongly to the move in gold bullion. The NYSE Arca Gold Miners Index (GDMNTR)1 advanced 22.7%, while the MVIS Global Junior Gold Miners Index (MVGDXJTR)2 gained 26.1%. Also, silver showed strong momentum gaining 17.0% in June to close the month at $18.71 per ounce, its highest level since September 2014.

Prior to Brexit, two earlier events in June supported gold. On June 3, the U.S. Department of Labor's May jobs report fell far short of expectations, continuing a pattern of declining job growth that began in March. The odds of a U.S. Federal Reserve rate increase tanked along with the U.S. dollar and gold advanced $34 per ounce to $1,244 per ounce. This allowed the metal to continue to establish a firm base above the technically important $1,200 level. On June 16, the Bank of Japan refrained from adding stimulus, disappointing markets that have become conditioned to expect economic life support from central banks. The Nikkei 225 Stock Average3 fell 3.1% and gold soared to a new intraday high for the year of $1,315 per ounce.

U.K.'s Brexit Move Defied Market Expectations

The United Kingdom's ("U.K.") decision on June 23 defied market expectations in passing the “Brexit” referendum to leave the European Union (EU). The financial and geopolitical ramifications of this were felt across financial markets, including stocks, bonds, and currencies. The U.K. and EU now has two years to work out the conditions of their divorce, and history has shown that few divorces end harmoniously. The level of uncertainty is high, and outcomes that damage growth and trade are easier to imagine than a win-win scenario. The ultimate risk in the longer term is the viability of the EU and the possibility that other countries may seek to exit or dismantle it. We hope for a more positive outcome and that Brexit acts as: 1) a wake-up call for the EU to become a more streamlined enabler of growth, rather than, in our view, the stifling super-state it has become, and; 2) a policy catalyst for the U.K. to again become a leader in trade and commerce that countries seek to emulate.

Gold Investors are Being Proactive, Rather Than Reactive

Throughout June, strong investment demand continued, as demonstrated by inflows into gold bullion exchange traded products (ETPs). Inflows have not been this strong since 2009 when investors sought out bullion after the subprime credit crisis. A key difference in today's market is that investors are being proactive rather than reactive. Many are seeing the looming potential for another financial crisis and making a strategic allocation to bullion as a hedge against systemic risk.

Our Gold Bull Market Conviction Strengthens

Last year we commented on the depth and duration of the gold bear market being on par with the worst in history and we began to adjust our strategy in anticipation of a turnaround. This year we have highlighted the strength and resilience of the gold market. In our last monthly update, we gained the conviction to declare a new bull market. Given the events of the first half, it is not hard to imagine a robust market for the remainder of the year. We believe gold will test the $1,400 per ounce level in the second half of 2016 and we do not believe it is likely to end there.

In addition to EU uncertainties on the back of Brexit, there are many other reasons we believe gold is reentering a secular bull market:

Monetary Policies – Unconventional monetary policies are not working as planned, causing central banks to resort to even more radical and unproven tactics with unknown consequences. According to a Fitch Ratings report, there is now over $11 trillion worth of sovereign debt with negative yields. The European Central Bank (ECB) started buying high yield corporate (junk) bonds on June 8.

Fiscal Policies – Global non-financial debt-to-GDP ratios have risen to new highs. In the U.S., total non-financial debt/GDP has reached 250%, helped by $1.2 trillion in student loans, many of which may never be repaid. China has total debt of approximately 225% of GDP, with corporate debt alone comprising an astounding 145% of GDP.

Economic Malaise – Global growth has been unable to muster strength, even with massive central bank stimulus and cheap energy provided by the historic crash in oil prices.

Currency Turbulence – No government wants a strong currency and Brexit has caused unwanted volatility that may bring destabilizing intervention.

U.S. Elections – At this time, our view is that there appears to be no good outcome in the upcoming presidential election. A Clinton victory is likely to bring a continuation of Obama policies that have resulted in a weak economy, rising debt, weak productivity, lack of business formation, and divisive politics. A Trump victory brings uncertainty and the potential for destabilizing policies if his rhetoric on trade, immigration, and debt service are pursued.

Low Returns – The six-year bull market in U.S. stocks appears to be over. The S&P 500® Index4 has struggled since reaching an all-time high in June 2015. Bonds no longer provide safe and steady returns. Investors may seek alternatives to help preserve wealth.

All of these developments can create risks for mainstream investments that potentially drive investors to gold as a currency hedge, store of wealth, or for insurance against financial and geopolitical turmoil. We are not promoting gloom and doom; however, as gold advocates, our role is to point out potential risks to an investment portfolio. Unfortunately, it seems that risks abound as a result of a financial system that has become overburdened with government intervention that stifles enterprise and free markets.

What to Expect for Gold in Second Half

If the fundamentals are supportive of a gold bull market, where might we expect the gold price to go in the future? For that we look at certain price chart patterns. Markets usually trend higher or lower over periods measured in months or years. The trends are defined by a sequence of higher highs and higher lows in a bull market, and lower highs and lower lows in a bear market. With the gold move following Brexit, a new gold trend may be emerging (Chart A). This trend has broken the 2013 – 2015 bear market trend; its trajectory is similar to the post-crisis trend from 2008 – 2011. In fact, some of the drivers, such as central bank intervention, increasing debt, and EU turmoil are the same. This indicates that gold has completed a mid-cycle correction and is resuming the secular bull market that began in 2001.

Chart A: Emergence of New Gold Price Trend
Gold Bullion Prices, 2008 to 2016

Emergence of New Gold Price Trend

Source: Bloomberg, VanEck Research.

Gold Stocks Still Have Upside

For an idea of where gold stocks might be heading, we use a plot of gold versus the GDMNTR Index. Chart B shows the relationship of gold stocks to gold bullion since 2012, which is roughly the time in which managements at many gold firms turned their companies around to become more efficient and focused on returns. The correlation5 statistic of 0.97 is a near perfect 1.00, which shows the strong relationship between gold and gold stocks.

Chart B: Gold Bullion versus Gold Shares (GDMNTR)
2012 to 2016 (Weekly Close)

Gold Bullion versus Gold Shares (GDMNTR)

Source: Bloomberg, VanEck Research.

In the first half of 2016 gold advanced $260 per ounce or 24.6%. The GDMNTR has gained 102.6% over the same period, leading many investors to question whether gold stocks have any upside left. While we do not expect such heady gains going forward, given the tight relationship between gold and gold stocks, we can use this trendline to estimate potential stock gains at higher gold prices. If gold were to advance another $260 (19.7%) from the June 2016 close, it would reach $1,582 per ounce. A trendline plot at $1,582 gives a GDMNTR value of 1,135, an additional 47% gain from the June close of 769. This beta, or leverage, to the gold price is a result of the strong cash generation that comes from higher gold prices.

Valuations are Important: P/CF Averages are Still Below Peak

It is also important to consider valuations. The performance of gold stocks has resulted in a strong increase in price-to-cash flow (P/CF) in 2016, as shown in Chart C. However, gold stocks became oversold in the recent bear market, driving valuations to historic lows. The strong stock gains in 2016 have yet to return gold stocks to their long-term P/CF averages, and they remain far below peak valuations.

Chart C: Price-to-Cash Flow of Senior- and Mid-Tier Producers, 2006 to 2016

Price to Cash Flow of Senior and Mid-Tier Producers

Source: Bloomberg, RBC Capital Markets.

Download Commentary PDF with Fund specific information and performance »


]]>
Brexit Creates Mid-Summer Opportunities https://www.vaneck.com/blogs/moat-investing/brexit-creates-mid-summer-opportunities-moats-july-2016/ Van Eck Blogs 7/13/2016 12:00:00 AM

For the Month Ending June 30, 2016

Performance Overview

U.S. moat-rated companies have posted impressive performance thus far in 2016, but their wide performance gap tightened in June amid the recent Brexit-induced global turmoil. For the first month this year, the U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR) trailed the S&P 500® Index (-1.99% vs. 0.26%) in June but maintained its relative outperformance year-to-date (12.78% vs. 3.84%). International moats fared similarly in June with the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN) lagging the MSCI All Country World Index ex USA (-4.68% vs. -1.53%). While Brexit took a toll on global equity prices, the U.K.'s decision to leave the European Union has heightened the importance of investing in U.S. and international moat companies that possess sustainable competitive advantages at attractive prices, like those that Morningstar seeks to identify.

U.S. Domestic Moats: Brexit Effects and the Microsoft-LinkedIn Connect

The Brexit decision that came at the end of June erased hard-earned early-month MOAT returns. In particular, large financial sector companies such as State Street Corporation (STT US), Bank of New York Mellon Corporation (BK US) and U.S. Bancorp (USB US), experienced the greatest spillover effect of Brexit. The performance of healthcare companies continued to be mixed. While Cerner Corporation (CERN US), Ely Lilly and Company (LLY US), and Amerisource Bergen Corporation (ABC US) contributed positively, biotech giants such as Gilead (GLD US), Amgen (AMGN US), and Biogen (BIIB US) detracted from performance. Notable within information technology sector, Microsoft's (MSFT US) announcement to acquire LinkedIn (LNKD US) boosted the performance of the professional networking site.

International Moats: Opportunities in Several Countries

As expected, the Brexit decision had a greater impact on international moat companies in June, and overall, negative outweighed positive performance. U.K. financials lead the negative performance group followed by Hong Kong, French, and Australian financial, consumer discretionary, and information technology sector companies. On a positive note, the materials and utilities sectors helped to offset the negative effects of Brexit. Companies from Singapore, Japan, New Zealand, and Germany were among the positive contributors to performance.



(%) Month Ending 6/30/16

Domestic Equity Markets

International Equity Markets

(%) Month Ending 6/30/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Ticker Total Return
LinkedIn Corporation Class A
LNKD US
38.64
Cerner Corporation
CERN US
8.82
Eli Lilly and Company
LLY US
6.62
AmerisourceBergen Corporation
ABC US
4.78
Starbucks Corporation
SBUX US 3.27

Bottom 5 Index Performers
Constituent Ticker Total Return
Bank of New York Mellon Corporation
BK US
-7.63
CBRE Group, Inc. Class A
CBG US
-11.29
State Street Corporation
STT US
-13.94
Biogen Inc.
BIIB US
-16.54
Jones Lang LaSalle Incorporated
JLL US
-17.32

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Ticker Total Return
CapitaLand Commercial Trust CCT SP 8.55
Symrise AG SY1 GR 8.22
Safran SA SAF FP 5.69
SoftBank Group Corp. 9984 JP 5.52
CapitaLand Limited CAPL SP 5.03

Bottom 5 Index Performers
Constituent Ticker Total Return
BNP Paribas SA Class A BNP FP -16.40
KBC Groupe SA KBC BB -17.63
Kingfisher Plc KGF LN -19.34
Henderson Group plc HGG LN -27.72
Lloyds Banking Group plc LLOY LN -31.06

View MOTI's current constituents

As of 6/17/16

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Polaris Inds Inc. PII US
AmerisourceBergen Corp. ABC US
Tiffany & Co. TIF US
Stericycle Inc. SRCL US
VF Corp. VFC US
Wells Fargo & Co. WFC US
Berkshire Hathaway Class B BRK.B US
Twenty-First Century Fox Inx. FOXA US
Harley-Davidson Inc. HOG US
United Technologies Corp. UTX US
Starbucks Corp. SBUX US
Microsoft Corp. MSFT US
Emerson Electric Corp. EMR US
American Express Co. AXP US
Salesforce.com CRM US
Time Warner inc. TWX US
Lilly Eli & Co. LLY US
Western Union Co. WU US
Compass Minerals Intl. CMP US
Cerner Corp. CERN US
Amazon.com Inc. AMZN US

Index Deletions
Deleted Constituent Ticker
St. Jude Medical STJ 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
Mgm China Holdings Ltd. China
Bayerische Motoren Werke BMW Germany
National Australia Bank Australia
Crown Resorts Ltd. Australia
Platinum Asset Management Ltd. Australia
Westpac Banking Corp. Australia
Carnival Plc. United Kingdom
Wynn Macau Ltd. Hong Kong
Wipro Ltd. India
Linde Ag. Germany
Kering Ord. France
Tata Motors Ltd. India
Amp Ltd. Australia
Commonwealth Bank of Australia Australia
Power Financial Corp. Canada
London Stock Exchange Group United Kingdom
United Overseas Bank Ltd. Singapore
Nordea Bank Ab. Sweden
Svenska Gandelsbanken Ab. Sweden
Safran Sa. France
Softbank Group Corp. Japan
Computershare Ltd. Australia
Seven & I Holdings Co. Ltd. Japan
Petrofac Ltd. United Kingdom
Capitaland Mall Trust United Singapore

Index Deletions
Deleted Constituent Country
Bank of Nova Scotia Halifax Canada
Toronto-Dominion Bank Canada
CI Financial Corp Canada
HSBC Holdings Plc. United Kingdom
Centrica United Kingdom
UBS Group Ag. Switzerland
Novartis Ag. Switzerland
Swatch Group. AG. B Switzerland
Richemont, Cie Financiere A Br. Switzerland
Loof Holdings Ltd. Australia
Ainsworth Game Technology Ltd. Australia
China Merchants Bank Co. Ltd. China
China Construction Bank Corp. China
BOC Hong Kong Holdings Ltd. China
China Mobile Ltd. China
China Telecom Corporation Ltd. China
China State Construction International Holdings Ltd. China
Dongfeng Motor Group Co. China
Credit Agricole SA. France
Technip SA. France
Mobile Telesystems PJSC Russia
Embraer SA. Brazil
Grifols SA. Spain
Sun Hung Kai Properties Ltd. Hong Kong
Contact Energy Ltd. New Zealand

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



]]>
Fallen Angels Boosted by Bond Buyback Premiums https://www.vaneck.com/blogs/etfs/fallen-angels-boosted-bond-buyback-premiums-july-2016/ Van Eck Blogs 7/8/2016 12:00:00 AM

Authored by Meredith Larson, Product Manager, ETFs

Fallen angel bonds, high yield bonds originally issued with investment grade credit ratings, are generally known for offering potential value. A big source of this value has been the tendency of fallen angels to be oversold, to below what may be considered fair value, leading up to their downgrade to high yield.

However, a less obvious source of value for fallen angels can arise when the underlying corporation engages in a bond buyback, typically in the form of a public tender. Bond buybacks are a form of “liability management” that can help companies tidy up their balance sheets, improve their credit standings and ratings, and attract and retain investors. Companies use buybacks either to retire debt at a discount or to reduce costs simply by buying back a higher yielding bond and then issuing a new bond at a lower interest rate.

How Buybacks Add Value

Companies typically establish a tender offer price that is a premium to a bond's current price in order to entice investors to sell. As of June 30th, 11 fallen angel companies had issued tender offers year to date, boosting their bonds' prices by 5%, on average, between the day prior to and the day after the tender offer. Mainly from basic industry and energy sector issuers, five of the 11 firms were 2016 fallen angel entrants: Ensco, Encana, Noble Holdings, Anglo American Capital, and Southwestern Energy Company.

As shown in the bar chart below, bonds with tender offers contributed +243 basis points (bps) to the 16.18% year-to-date return of the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), as of June 30th. By contrast, the BofA Merrill Lynch US High Yield Index (H0A0) returned 9.32%, of which just +57 bps can be attributed to bonds with tender offers in 2016.

YTD Return Contribution from Bonds with Tender Offers
As of June 30, 2016

 
Source: FactSet. Past performance is no guarantee of future performance. Contribution is presented for the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA) versus BofA Merrill Lynch US High Yield Index (H0A0) for the broad high yield bond market. Figures are gross of fees, non-transaction based and therefore estimates only.

A greater proportion of the H0FA Index than the H0A0 Index has been impacted by bond buybacks. As of June 30th, 10.5% of the H0FA index's market value was comprised of bonds that had issued tender offers year to date, versus the broad high yield bond market's 3.3% (H0A0). One major difference for fallen angel investors is that the debt issued to finance buybacks does not qualify for the H0FA index, since the new bonds would typically be issued as high yield. As such, fallen angel investors are not financing the buyback by buying new debt.

Companies recognize the value in buying back bonds for a variety of reasons; for investors it signals both the companies' willingness and ability to meet their debt obligations. For fallen angels, bond buybacks have served as another source of value so far this year. We believe bond buybacks offer another compelling reason for investors to look at the potential of this asset class.

]]>
Spin-Off in the Spotlight: Associated Capital Group (NYSE: AC) https://www.vaneck.com/blogs/etfs/spin-off-associated-capital-group-july-2016/ Van Eck Blogs 7/1/2016 12:00:00 AM

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

Spin-Off Company: Associated Capital Group, Inc. (NYSE: AC)
Parent Company:
Gabelli Asset Management (NYSE: GBL)  

Spin-Off Date: December 1, 2015
GSPIN Index Inclusion Date: April 1, 2016

Associated Capital Group, Inc. ("Associated Capital"; NYSE: AC) was first added to the Horizon Kinetics Global Spin-Off Index (the "Index") on April 1, 2016, after being spun off from Gabelli Asset Management ("GAMCO"; NYSE: GBL) in November 2015. The company has two divisions: institutional research, which is a mature business with low growth prospects, and alternative investments, which is a potentially high-growth operation.

The Associated Capital spin-off was conceived as a way to liberate the alternative investment operations from GAMCO and provide it with the opportunity for unfettered growth. This division managed $1.1 billion of client assets in merger arbitrage and event-driven value strategies as of March 31, 2016. Although this constituted less than 3% of GAMCO’s total assets under management (AUM) at the time of the spin-off, the division was growing, as the remainder of GAMCO was facing redemptions. Had the alternative investment division become successful as a part of GAMCO, its value might have been diluted. As a separate, publicly-traded entity, however, this should no longer be the case.

AUM and Net Income Growing, Despite Operating Losses

Associated Capital is still immature in that current revenues have been insufficient to cover operating expenses. The company has progressively increased its AUM, but it has still produced operating losses, although its net income has been slightly positive as a result of investment gains and interest income. For this reason, the company’s shares cannot be said to be undervalued based on traditional valuation measurements such as its price-to-earnings multiple. Instead, the investment might be better understood from a risk versus return perspective.

The company was capitalized with a large amount of liquid assets, including cash, common stock, and mutual funds at the time of the spin-off. In total, there were $813 million of assets on its balance sheet (as of 3/31/2016), of which cash and other marketable investments accounted for $616 million, or about 75% of the total. Thus, it is clear that GAMCO infused Associated Capital with enough assets to sustain the company until it can grow its AUM to the point of self-sufficiency. With operating losses of $15-$20 million per year, the company’s cash balance alone ($203 million) could fund such losses for more than a decade.

Associated Capital’s adjusted book value was approximately $40 per share as of March 31, 2016, meaning that at current prices, the company trades well below 1x book value. Although ongoing losses might erode shareholders’ equity, these losses have been small to date; therefore, it can be argued that the investment risk is limited, as an investor would likely be protected from a meaningful loss given the company’s ample balance sheet assets.

Promising Growth Potential

Investment management services is a business with high operating leverage. In principle, the marginal cost of managing an additional dollar of AUM is, for all practical purposes, nil. When an investment firm increases its assets from $1 billion to $5 billion, expenses do not increase fivefold, although incentive compensation within the firm typically rises. Consequently, we believe that Associated Capital’s earnings have the potential to rise rapidly even if AUM growth is modest; this is especially so, since it is eligible to earn performance fees. As Associated Capital’s AUM is just $1.1 billion (as of 3/31/16), we believe that its growth potential is considerable.

View Current SPUN Fund Holdings  

View Current GSPIN Index Holdings  

 

 
]]>
China A-Shares Denied MSCI Green Light https://www.vaneck.com/blogs/etfs/china-a-shares-fail-from-msci-june-2016/ On June 14, in a surprise decision to many investors, MSCI again denied mainland Chinese equities (China A-shares) a seat at the global indexing table, excluding A-shares from its benchmark MSCI Emerging Markets Index.

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

Authored by James Duffy, Product Manager, VanEck Vectors ETFs

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

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

China's Measures for Inclusion Fall Short

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

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

Chinese Regulators Make Progress

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

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

MSCI Emerging Markets Index
Country Weights - Actual

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

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

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

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

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


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

Yield Curve-Focused

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

Credit-Focused

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

Smart Beta

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

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

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

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

Authored by William Sokol, Product Manager, ETFs

Strong Relative Performance

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

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

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

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

Attractive Characteristics

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

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

Why Higher Yields?

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

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

Source: BofA Merrill Lynch.

Hidden Value

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

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

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

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

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

Authored by James Duffy, Product Manager, VanEck Vectors ETFs

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

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

Possible Counterbalance to China

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

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

Growing Economy Targets Services and Industry

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

Culture of Business Entrepreneurship

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

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

Vietnam Stock Market Capitalization
2007-2015

Source: Bloomberg.

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

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

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

For the Month Ending May 31, 2016

Performance Overview

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

U.S. Domestic Moats: May M&A

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

International Moats: Financials in Flux

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

Special Update: Morningstar Index Enhancements

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

Read more about Morningstar's index methodology enhancements »



(%) Month Ending 5/31/16

Domestic Equity Markets

International Equity Markets

(%) Month Ending 5/31/16

Morningstar
Wide Moat Focus Index (MWMFTR)

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

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

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

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

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

View MOTI's current constituents

As of 3/18/16

Morningstar
Wide Moat Focus Index (MWMFTR)

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

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

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

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

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

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

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



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

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

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

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

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

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

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

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

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

Flood of Supply from China

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

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

China's Overcapacity Problem

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

Chart C: China's Net Steel Exports

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

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

U.S. Steel Prices' 2015 Collapse

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

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

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

Upside Potential for U.S. Steel Prices

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

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

Trade Protection Taking Shape

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


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

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

For the month ending May 31, 2016

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

U.S. Economic Data Mixed

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

Disappointing May Jobs Report the Most Impactful

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

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

Gold ETPs Have Increased 27% in 2016

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

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

Gold Entering Early Stages of a New Bull Market

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

Gold Price Monthly Return Average, 1971-2015 and 2016

Gold Price Monthly Return AverageSource: Bloomberg, Scotiabank GBM

Gold Companies Transitioning with Higher Cash Flows

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

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

Companies Shifting Focus Toward Growth and Profitability

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

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

Download Commentary PDF with Fund specific information and performance »


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

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

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

Authored by James Duffy, Product Manager, VanEck Vectors ETFs

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

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

MSCI Collaborated with China to Foster Inclusion

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

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

China Has Instituted Many Positive Changes

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

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

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

 

Source: MSCI.

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

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

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

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

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

Municipal Bond Fund Flows

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


Municipal Bond New Issuance

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

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

Post Specific Disclosures

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

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

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

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

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

M&A Activity Can Strengthen Moats

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

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

M&A Deals in the Works

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

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

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

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

Click here for more details on MOAT holdings.

Morningstar Valuation Analysis

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

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

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

Authored by James Duffy, Product Manager, VanEck Vectors ETFs

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

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

China's New Economy Outperforms Old Economy

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

China's New Economy Outperforms Old Economy

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

Leshi to Expand Offerings to Young Consumer Demographic

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

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

Le Vision Expands Leshi's Reach to Hollywood

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

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

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


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

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

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

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

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

So, why this short academic exercise?

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

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

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

Source: BofA Merrill Lynch.

Post Specific Disclosures

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

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

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

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

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

California: A Model Fit for Storage

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

Indicative Hourly Conventional Electric Utility Demand

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

The Need for Bigger, Better, Cheaper Batteries

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

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

Tesla: Pioneering the Cost Curve

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

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

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

This is Only the Beginning for Storage

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


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

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

Authored by William Sokol, Product Manager, ETFs

EM Bond Creditworthiness Has Improved

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

But Has the Improvement Trend Stalled?

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

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

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

 

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

Positive Credit Stories Can Still be Found

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

Diversify within EM Bonds

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

Potential for Higher Yields and Increased Diversification

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

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


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

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

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

Alternative Energy: A Transformative Storage Boom?

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

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

California and Hawaii Lead U.S. Solar Adoption

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

Total U.S. Solar Demand  

 
Source: SEIA, Solar Energy Industries Association.

 

Cumulative U.S. Solar Demand by State  

 
Source: GTM Research.

 

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

Modernizing the Electric Grid

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

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

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


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

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

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

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

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

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

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

Post Specific Disclosures

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

2Source: Moody's Investors Services.

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

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

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

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

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

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

Watch Video Video - Navigating the Oil Market's Rebalancing  

Shawn Reynolds, Portfolio Manager

Watch Now  


 

Oil Market's Shifting Supply and Demand Fundamentals

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

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

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

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

 

Source: Bloomberg, as of March 2016.

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

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

Big Oil Projects Postponed or Canceled

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

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

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

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

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

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

Geology, Technology, and a Healthy Balance Sheet are Critical

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

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

Technology Should be Part of the Company’s DNA

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

Balance Sheet Strength Fosters Innovation

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

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

BUTCHER: Thank you.

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

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

For the month ended April 30, 2016

Gold Up 5% in April, Climbing 22% YTD

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

A Notable Surge for Silver

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

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

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

Market Outlook: Are Gold Stocks Overbrought?

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

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

Gold Still Below 2011 Levels, But Earnings Power is Stronger

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

Gold Supported by Negative Sentiment Toward Central Bank Policies

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

Governments Failing to Stimulate Economic Growth

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

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

Regulatory Burdens Punish the Private Sector

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

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

The UN is a Sobering Example of a Governmental Institution

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

Environment of Uncertainly Supports Gold Investments

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

Download Commentary PDF with Fund specific information and performance»

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

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

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

For the Month Ending April 30, 2016

Performance Overview

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

U.S. Domestic Moats: Healthcare Rotation Pays Off

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

International Moats: Oh, Canada

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

Shooting for the Stars

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

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



(%) Month Ending 4/30/16

Domestic Equity Markets

International Equity Markets

(%) Month Ending 4/30/16

Morningstar
Wide Moat Focus Index (MWMFTR)

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

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

View MOAT's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

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

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

View MOTI's current constituents

As of 3/18/16

Morningstar
Wide Moat Focus Index (MWMFTR)

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

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

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

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

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

Index Deletions
Deleted Constituent Country
National Australia Bank Ltd Australia
Goodman Group Australia
Spotless Group Holdings Ltd Australia
Qube Holdings Ltd Australia
Banco Santander Chile Chile
Empresa Nacional De Electricidad Sa Chile
Agricultural Bank Of China Ltd China
Bank Of China Ltd China
Industrial And Commercial Bank Of China Ltd China