VanEck Blog https://www.vaneck.com/templates/blog.aspx?pageid=12884907249?blogid=2147483856 Insightful, Weekly Commentary on the Municipal Bond Markets 2018-07-20 en-US Solid EM Micro Despite Macro Angst https://www.vaneck.com/blogs/emerging-markets-equity/solid-em-micro-despite-macro-angst/ Q2 proved challenging, sparking conflicting views on emerging markets, but we continue to emphasize the underlying health of the asset class.

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VanEck Blog 7/19/2018 12:00:00 AM

Conflicting Views Pervade

It has certainly been a challenging quarter, leading to conflicting and bifurcated views on the emerging markets asset class and contrasting macro angst with solid bottom-up metrics. Despite a fairly robust global economic and profit growth backdrop and reasonable valuations, investor sentiment is negative.

Looking at the big picture issues first, the key areas of concern appear to be U.S. dollar liquidity and U.S. interest rates, the rise in the U.S. dollar, and fear of an escalating tariff war.

Currency losses accounted for the majority of the Morgan Stanley Capital International Emerging Markets Index’s (MSCI EM’s) weakness for both the quarter and year-to-date. In local currency terms, the MSCI EM Index was down 3.41% and 2.67% for the quarter and year-to-date, respectively. In general, Asian emerging economies fared better than non-Asian. Argentina, Brazil, and China A shares performed worst during the quarter, whereas China (ex A Shares) and India held up reasonably well. On a sector level, energy and healthcare led, while financials and telecommunication services lagged.

From Macro to Micro

As you all know, we focus on stock specifics first, but this is a period when global risks are prominent, while EM micro looks nicely benign. Global U.S. dollar liquidity has tightened because the Fed has stopped expanding its balance sheet. Liquidity tightening has also been driven by pro-fiscal policies in the U.S. In addition, China until recently has been effectively tightening, although driven by the relatively good reason of reducing shadow banking exposure.

In general, U.S. interest rates moved up through the quarter due to fears over a heating economy and higher inflation, but have backed off from their mid-quarter highs. It is likely, in our view, that the long end of the yield curve has seen its highest yields for this year. It is certainly worth noting that in emerging markets, the real rate spreads (i.e, accounting for inflation) versus developing markets are exceptionally high. Essentially, inflation in aggregate is low for emerging markets (though it is picking up). Higher real rates should ultimately give emerging markets economies some buffer to help protect their currencies.

The U.S. dollar’s move upward so far this year has been negative for the asset class. In sum, we believe that this is more in the nature of a counter-trend rally, in part driven by higher economic growth and the impact of corporate remittances. However, we have seen the U.S. Dollar Index give up some of its gains in the last several days.

The other significant macro factor adding to emerging markets weakness has been protectionist moves emanating from the U.S., leading to retaliation from China in particular. The actual moves have very little impact on fundamentals, but the fear is based on an all too plausible scenario of increased escalation, until the pain forces a compromise. The moves appear to play well to a core part of President Trump’s political base, yet China is unwilling either to lose face by not responding or compromising on its Made in China 2025 goals. For China, part of the difficulty is actually determining the real U.S. policy and who speaks for the administration. In our view, it is not necessarily the case that foreign access to U.S. markets is more valuable, but rather, the other way around. The U.S. has three times more foreign direct investment in China. Also, it is worth noting that the direct revenue exposure of Chinese companies to the U.S. is in the single digits, and the interconnectivity of supply chains makes trade wars unproductive for all. But the threat of increased measures will likely not go away any time soon, and depending on how politics play out, it may even accelerate.

Turning to emerging markets-specific issues, in a situation of generally tighter liquidity, those countries with persistent capital demands and/or missteps in macro policy are inevitably hurt the hardest. There have been some specific political issues in some of the areas with the highest financing needs, but these are hardly core to the emerging markets equity story. Argentina led the pack with backtracking on fiscal rectitude combined with stubborn inflation. The currency took it on the chin. In Turkey, concerns about complicated and overly loose monetary policy allied to increase the possibility of further financial pressure following a presidential election win for Recep Tayyip Erdogan. In South Africa, the gloss of the Cyril Ramaphosa presidential election win has been dulled by weak real economic indicators led by high inflation and a weak twin deficit. In Brazil, the truckers strike had a real economic impact.

On a micro level, corporates in emerging markets are generally faring pretty well, and among the stocks that we have on our focus list, there has been very minimal erosion of the prospects for this year. Return on equity is continuing to turn around, and capital discipline has led to higher free cashflow. Not to minimize the impact of these global issues, but to us, the sum of the parts does not seem to add up to the whole.

Valuations are now cheap, and positioning is not aggressive. In fact, outflows in the past two months have resulted in net outflows year-to-date for the asset class, making it one of the largest periods of “capitulation” in terms of yearly rolling flows. The echo chamber of angst creates great opportunities in the asset class, in our view. The key, as always, is not to get carried away with sentiment. Secular themes like quality Chinese consumption are not going away anytime soon.

Strategy Review and Positioning

Growth stocks continued to outperform value stocks during the second quarter and aided the relative performance of the emerging markets equity strategy. Conversely, the continued underperformance of small caps as opposed to their large cap counterparts detracted. From a sector standpoint, consumer discretionary and real estate sectors worked well , while financials and healthcare contributed negatively to relative performance. On a country level, China, combined with underweight positions in South Africa and Brazil, had a positive impact, whereas exposures and overweight positions in both Argentina and Turkey detracted.

Top Performers/Detractors

The top performers during the quarter included two companies from China and one from India. China Maple Leaf Educational Systems performed best during the quarter as educational companies in China continued to do well. The company delivered solid and slightly better than expected results and was rewarded as investors continued to appreciate its business model. Huazhu Group (the renamed China Lodging) also delivered good results. Investors appreciated the company’s solid execution and its asset-light expansion plans in addition to good operating leverage. HDFC Bank continued to execute well and gain market share.

The bottom performers include Grupo Supervielle, an Argentinean bank. The company’s weak performance had nothing to do with the bank but was, rather, driven entirely by macro. The fact that rates have been raised substantially and that inflation has been higher does dull the investment story somewhat. Samsung Electronics was also among the bottom performers as the tussle between those who think the semiconductor industry is peaking out and those who don’t continued. At the margin, earnings have been a little disappointing this quarter for a variety of reasons, but the stock looks cheap at current levels. Srisawad Corporation also detracted as its lending business disappointed in terms of margins. The disclosure of one large non-performing loan, albeit well collateralized, took the market by surprise.

Outlook

We believe the outlook remains bright for emerging markets. We continue to emphasize the underlying health of the asset class. Moving through macro angst will allow these good corporate fundamentals to shine through. Given this outlook, cheap valuations, and light positioning, this period may ultimately prove to have been an attractive time to maintain or increase exposure to the asset class.

In terms of fears going forward, our concern lies much more with the shape of the yield curve and what that may presage about economic difficulties in the future. It is something to watch rather than a real, vibrant concern right now. It is our view that we are more likely to see a weakened U.S. dollar for multiple reasons, including a twin deficit, policy that favors a “competitive currency”, a possible top in yields with a further advanced interest rate cycle, and slackening corporate remittances. We will continue to stick to disciplined, stock-by-stock investing, while remaining aware of the influence these macro factors can have.

Download Commentary PDF with Fund specific information and performance.
For a complete listing of the holdings in VanEck Emerging Markets Fund (GBFAX) as of 6/30/18, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

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China Steps Up Support to Growth https://www.vaneck.com/blogs/emerging-markets-daily/china-steps-up-support-to-growth/ Interesting policy action was taken in emerging markets today – with only China daring to ease further.

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VanEck Blog 7/19/2018 12:00:00 AM

Interesting policy action was taken in emerging markets today – with only China daring to ease further.

China’s new policy initiatives and a very big move in the Chinese yuan (down by 96bps vs. U.S. dollar at 8:40am ET, according to Bloomberg LP) generated a lot of buzz this morning. The goal is to provide additional liquidity to local banks (through the medium-term lending facility, among other things – see chart below) in order to buy lower-rated corporate bonds and boost lending to small and medium-sized enterprises. The news about more policy easing added to pressure on the yuan (pulling most emerging markets currencies down with it). The People’s Bank of China chose to stay on the sidelines – adjusting the fix weaker and signaling that it is okay with more volatility for now.

Emerging markets central banks continue to stay alert, with South Africa and Indonesia opting for a “hawkish hold” today. The reasoning is straightforward. Both central banks see their respective currencies as sensitive to global monetary policy changes (and the resulting shifts in foreign exchange inflows), which could mean upside risks to inflation. Bank Indonesia Governor Perry Warjiyo pledged more policy frontloading (accompanied by dual interventions in bonds and currency), while South African Reserve Bank Governor Lesetja Kganyago noted that the model-implied rates path shows hikes (the market currently prices in 46bps of tightening in the next twelve months).

The ongoing increase in Turkey’s inflation expectations is a key reason why markets remain uneasy about the country’s investment case. The 12-month ahead expectations climbed to 11.07% in July – the highest since early 2004. All eyes are now on the central bank’s policy meeting next week. The consensus believes that the board will be allowed to increase the benchmark rate by about 40bps in order to address these concerns.

 

Chart at a Glance

China Medium-Term Lending

Source: Bloomberg LP

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Argentina’s Inflation Woes Grow https://www.vaneck.com/blogs/emerging-markets-daily/argentina-inflation-woes-grow/ Inflation and activity surprises in emerging markets hold central banks firmly in the spotlight.

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VanEck Blog 7/18/2018 12:00:00 AM

Inflation and activity surprises in emerging markets hold central banks firmly in the spotlight.

Argentina’s June inflation looked predictably scary. Headline inflation surged to 29.5% year-on-year on the back of the currency’s sell-off, getting uncomfortably close to the upper bound of the International Monetary Fund’s 32% target. Core inflation hit 26.9%. With more inflation pressures in the pipeline, there is no room for the central bank to ease its policy stance any time soon. A silver lining is that the 40% benchmark rate (equivalent to the 8.1% real rate) should have a cooling effect on domestic activity, reducing inflation risks down the road.

A downside inflation surprise in South Africa is unlikely to alter the central bank’s cautious policy stance. Headline inflation rose by less than expected to 4.6% year-on-year and core inflation eased to 4.2% in June – mostly due to lower services/rental prices (see chart below). The numbers send a strong signal that domestic demand pressures remain contained. Still, several factors (including a weaker exchange rate) are likely to push headline inflation higher in the second half of the year. Together with the expected U.S. Federal Reserve interest rate hikes, this should keep the central bank on its toes. The market currently prices in 18bps of tightening in the next six months, which does not look too aggressive to us.

The latest batch of Poland’s activity data puts the central bank’s ultra-dovish policy stance back in the spotlight. The economy continues to look very resilient despite signs of weakness in the Eurozone, with industrial production expanding by 6.8% and construction output by 24.7% year-on-year in June. The strength of domestic activity and the labor market’s tightness reinforce expectations that core inflation will rebound in the second half of the year, questioning the central bank’s intention to stay on hold into 2020. Two full hikes are now firmly in the price for the next two years.

 

Chart at a Glance

South Africa Inflation

Source: Bloomberg LP

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South Africa’s Growth Cliffhanger https://www.vaneck.com/blogs/emerging-markets-daily/south-africa-growth-cliffhanger/ Uncertainty about the emerging markets growth outlook persists, challenging some of the latest International Monetary Fund forecasts.

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VanEck Blog 7/17/2018 12:00:00 AM

Uncertainty about the emerging markets growth outlook persists, challenging some of the latest International Monetary Fund forecasts.

A big disconnect between consumer and business confidence indicators in South Africa points to potential downside growth risks going forward. While the latter continued to slide down in June, consumer confidence and the household financial outlook stayed close to the all-time high in Q2 – defying concerns about the post-election correction in the absence of concrete policy moves (see chart below). The correction risks cannot be dismissed at this stage, given the negative impact of rising inflation and higher value-added tax (VAT)1 and petrol taxes on disposable income. Household consumption was the biggest positive driver of South Africa’s gross domestic product (GDP) so far this year, so a drop in consumer confidence may have material implications for the growth trajectory in the second half of the year.

At last, a positive surprise in Turkey’s macro flow. The industrial production (IP) growth was stronger than expected in June, accelerating to 6.4% year-on-year. Still, Turkey is not out of the woods yet. The seasonally-adjusted IP growth rate is still trending down, Purchasing Managers’ Indices (PMIs) look weak, and import volumes are moderating, which explains the market’s focus on the near-term policy direction – especially as regards to another round of fiscal stimulus later this year.

The latest activity numbers in the U.S. looked quite decent, with the industrial production growth surprising to the upside (at 3.8% year-on-year, close to the pre-crisis average) and capacity utilization grinding a touch higher in June (medium-term floor for inflation). Today’s releases look perfectly in line with U.S. Federal Reserve Chairman Jay Powell’s introductory remarks in the Senate (gradual rate hikes to keep inflation near target), as well as with the market’s attaching a 90% probability to a rate hike by the Federal Reserve in September.

 

Chart at a Glance

South Africa Consumer Confidence

Source: Bloomberg LP

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U.S. Moats Back on Track https://www.vaneck.com/blogs/moat-investing/us-moats-back-on-track/ U.S. moats bounced back in a big way in June as several companies and sectors contributed to a strong month, but international moats continued to struggle.

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VanEck Blog 7/16/2018 12:00:00 AM

For the Month Ending June 30, 2018

Performance Overview

International moats outpaced the broad international market in June, but posted a loss on an absolute basis as international stocks continued to struggle. The Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index") led the MSCI All Country World Index ex-USA modestly in June (-1.65% vs. -1.88%, respectively). Domestic moat companies, as represented by the Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index"), surged in June and outperformed the S&P 500® Index by nearly 2% (2.46% vs. 0.62%, respectively).

International Moats: Aero Trends Take Off

Mexico was the strongest performing country within the International Moat Index. The index’s two Mexico-based airport companies, Grupo Aeroportuario del Centro Norte (OMAB MM, +14.90%) and Grupo Aeroportuario del Pacifico (GAPB MM, +10.17%) posted strong returns for the month, and Mexican telecom company America Movil (AMXL MM, +8.84%) pared some of its losses from earlier in the year. The index’s top performer overall was Rolls Royce Holdings (RR LN, +18.90%), a major producer of airline engines (not the producer of Rolls Royce motorcars). The firm also saw its fair value estimate increased by Morningstar analysts in June. Industrials struggled in June along with companies from China, Germany, Singapore, and Hong Kong. Not all airport companies performed well, as Beijing Capital International Airport Co. (694 HK, -28.72%) struggled following the decision by China’s Ministry of Finance to revoke grants to the company and several others in the industry. Morningstar analysts reduced the company’s fair value estimate by 28%.

U.S. Domestic Moats: Buyout Battle

The U.S. Moat Index received a major boost from Twenty-First Century Fox Inc. (FOXA US, +28.90%) as Comcast Corp. (CMCSA US, +5.23%) and Walt Disney Co. (DIS US, +5.37%) bid back and forth in an attempt to acquire the media company. Other well-known consumer goods companies also performed well in June. Campbell Soup Co. (CPB US, +20.51%) recovered from a steep decline in May to finish the month within the range it was trading earlier in the year. Nike (NKE US, +11.28%) also performed well after posting strong results to finish off its 2018 fiscal year. The only sectors to detract from performance were energy and financials, albeit only slightly.

 

(%) Month Ending 6/30/18

Domestic Equity Markets

International Equity Markets

(%) As of 6/30/18

Domestic Equity Markets

International Equity Markets

(%) Month Ending 6/30/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Total Return
Twenty-First Century Fox Inc Class A 28.90
Campbell Soup Co 20.51
Nike Inc B 11.28
Allergan PLC 10.56
L Brands Inc 8.76

Bottom 5 Index Performers
Constituent Total Return
Starbucks Corp -13.80
Charles Schwab Corp -8.13
John Wiley & Sons Inc Class A -7.96
Microchip Technology Inc -6.60
McKesson Corp -6.02

View MOAT's current constituents
View MWMZX's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Total Return
Rolls-Royce Holdings PLC 18.90
Grupo Aeroportuario del Centro Norte SAB de CV 14.90
LINE Corp 14.60
China Resources Gas Group Ltd 14.08
Gas Natural SDG SA 11.43

Bottom 5 Index Performers
Constituent Total Return
Beijing Capital International Airport Co Ltd H -28.72
KION GROUP AG -11.34
CapitaLand Ltd -10.42
Beijing Enterprises Holdings Ltd -10.38
Industrial And Commercial Bank Of China Ltd H -9.71

View MOTI's current constituents

As of 6/15/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Campbell Soup Co CPB US
General Mills Inc GIS US
Comcast Corp A CMCSA US
Philip Morris International PM US
Dominion Energy Inc D US
Procter & Gamble PG US
Hershey Foods Corp HSY US
PepsiCo Inc PEP US
Colgate-Palmolive Co CL US
Franklin Resources Inc BEN US

Index Deletions
Deleted Constituent Ticker
Monsanto Co. MON US
Veeva Systems Inc A VEEV US
Stericycle Inc SRCL US
VF Corp VFC US
Lowes Cos Inc LOW US
TransDigm Group TDG US
John Wiley & Sons Inc. A JW.A US
Emerson Electric Co EMR US
Visa Inc A V US
NIKE Inc B NKE 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 Corporation Canada
Credit Suisse Group AG Switzerland
Fanuc Corp Japan
UBS Group AG Switzerland
LINE Corp Shs Japan
Beijing Capital Intl Airport China
Agricultural Bank of China China
SK Telecom South Korea
Nabtesco Japan
Shire PLC United Kingdom
Denso Corporation Japan
Rolls-Royce Holdings PLc United Kingdom
CI Financial Inc. Canada
National Australia Bank Australia
HeidelbergCement Germany
SCOR SE Act Prov Regpt France
Murata Mfg Co. Ltd 100 Japan
Magellan Financial Group Australia
GlaxoSmithKline PLC United Kingdom
Anta Sports Products China
Yum China Holdings Inc China
Platinum Asset Management Ltd Australia
IOOF Holdings Limited Australia
TPG Telecom Ltd Australia
Kubota Corporation Japan

Index Deletions
Deleted Constituent Country
Nordea Bank AB Common Stock Sweden
Contact Energy Limited Common Stock New Zealand
Telecom Italia Az. Italy
Grupo Aeroportuario del Centro Norte S.A.B. de C.V. Mexico
Smiths Group PLC Ordinary Shares United Kingdom
Samsonite International S.A. Common Stock Hong Kong
Meggitt PLC Shs United Kingdom
Telefonica S.A. Common Stock Spain
Infosys Ltd India
Crown Resorts Ltd Australia
Mobile TeleSystems PJSC * Russian Federation
Danske Bank A/S Shs Denmark
Vodafone Group PLC Common Stock United Kingdom
Roche Holding AG Dividend Right Cert Switzerland
Swedbank AB Ordinary Shares A Sweden
Oversea-Chinese Banking Singapore
GEA Group Aktiengesellschaft Germany
Sanofi France
Commonwealth Bank of Australia Ordinary Share Australia
SoftBank Group Corp shs Japan
Bayer AG Namen-Akt Germany
Grupo Aeroportuario del Pacifico SAB de CV Com Stk B Mexico
China Resources Gas Group Ltd China
Wipro Ltd. India

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



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China Slowdown Reflects Structural Change https://www.vaneck.com/blogs/emerging-markets-daily/china-slowdown-reflects-structural-change/ ]]> VanEck Blog 7/16/2018 12:00:00 AM

New International Monetary Fund projections point to less synchronized global growth, but with no downside revisions for some key emerging markets, including China.

China’s activity continued to moderate in Q2, driven by lower government spending and investment. Details are mixed, but there are signs of ongoing structural change in the economy. Even though fixed investments are trending down, manufacturing investment continued to rebound in June (see chart below). Private investments are also holding on reasonably well at 8.4% year-to-date (vs. record-low state-owned enterprise (SOE) investments). A sizable moderation in the industrial production growth mostly reflected a base effect. Finally, reduced fiscal stimulus is actually an orthodox move given the impact of the lower value-added tax (VAT)1 rate on revenue collection. Today’s releases support arguments in favor of some policy fine-tuning in the second half of the year – the forthcoming mid-year economic conference and the Politburo meeting should provide more detail.

The International Monetary Fund (IMF) has just released its updated growth forecasts, which look in line with the “less synchronized” growth narrative. The U.S. gross domestic product (GDP) forecasts for 2018 and 2019 remained unchanged (2.4% and 2.2%, respectively), while the Eurozone’s growth projection for this year was cut by 0.2% to 1.9%. Among emerging markets, Latin America’s growth forecast underwent the most significant change (down by 0.4% in 2018 and 0.2% in 2019), whereas China is still expected to grow by 6.6% in 2018 and 6.4% in 2019. Finally, while the global growth projections for 2018 and 2019 remained unchanged at 3.9%, the IMF pointed to more downside risks due to trade tensions and tighter financial conditions.

The latest data releases point to stronger inflation pressures in many emerging markets, justifying a more cautious monetary policy stance. A massive surge in India’s wholesale inflation (5.77% year-on-year in June) reported today is noteworthy as it brings the Wholesale Price Index (WPI)2 back to the levels last seen in December 2013. The rise was broadly based, fully supporting market expectations of the August interest rate hike.

 

Chart at a Glance

China government spending and investment

Source: Bloomberg LP

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China Steps Up Shadow Lending Crackdown https://www.vaneck.com/blogs/emerging-markets-daily/china-steps-up-shadow-lending-crackdown/ China continues to battle shadow financing, with measurable implications for the overall leverage in the economy.

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VanEck Blog 7/13/2018 12:00:00 AM

China continues to battle shadow financing, with measurable implications for the overall leverage in the economy.

China’s latest credit aggregates clearly demonstrate that authorities are continuing to reduce leverage in the economy and that this is being done by cutting shadow financing. New Chinese yuan loans surprised strongly to the upside in June, expanding by 11.4% year-on-year on a 12-month rolling basis. However, shadow loans posted the largest monthly drop on record, with year-on-year growth dipping into negative territory (see chart below). As a result, total social financing was lower than expected, keeping the gradual moderation trend intact. The next batch of activity indicators will be released over the weekend, and this should provide a better idea about the need to fine-tune the current policy framework.

The Peruvian central bank decided to give an extra boost to domestic activity by keeping its benchmark rate unchanged at 2.75%, with below-the-target inflation and fiscal discipline providing necessary policy room. Going forward, we’re keeping an eye on the inflation and growth trajectories, as the latest numbers surprised meaningfully to the upside. If this trend continues, the tightening cycle in Peru may begin earlier than expected.

The U.S. dollar’s reaction to negative surprises in the University of Michigan’s July survey was muted. However, a sizable drop in the expectations index1 and inflation forecasts (10-year inflation is now seen at 2.4% vs. 2.6% a month ago) raises questions about the sustainability of the U.S.’ relative outperformance in the developed world (read: fundamental support for the dollar).

 

Chart at a Glance

China shadow financing levels

Source: VanEck; Bloomberg LP

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India Inflation Signals More Hikes https://www.vaneck.com/blogs/emerging-markets-daily/india-inflation-signals-more-hikes/ Growth, inflation, and fiscal outlooks remain challenging in many emerging markets.

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VanEck Blog 7/12/2018 12:00:00 AM

Growth, inflation, and fiscal outlooks remain challenging in many emerging markets.

India’s latest inflation numbers show that breathing space for the central bank remains limited. Even though headline inflation accelerated less than expected in June (to 5% year-on-year), it remains well above the target, while core inflation rose to 6.35% (see chart below). Another round of the Indian rupee’s weakness and higher oil prices pose additional inflation risks going forward. It is with these considerations in mind that markets continue to price in 21bps of hikes for the next three months and two full hikes for the next six months.

The weakness of the growth momentum in parts of Latin America is concerning – especially in regards to potential implications for the fiscal outlook. Brazil’s retail sales remained lukewarm in May (up 2.7% year-on-year), while Mexico’s industrial production (a mere 0.1% month-on-month and 0.26% year-on-year) undershot consensus by a very wide margin. The fiscal connection (stronger activity=higher revenues) is moving to the forefront now given the sheer size of pre-election commitments in Mexico and reports that Brazilian Members of Parliament are weakening budget commitments for next year to the tune of BRL100B.

The U.S. dollar was a bit disappointed by June’s inflation print, sliding by 22bps vs. the euro after the release. Even though both headline and core inflation accelerated last month, there were no upside surprises, and the inflation momentum now looks weaker than in early 2018. Today’s numbers had little impact on market expectations regarding September’s rate hike by the U.S. Federal Reserve, but the implied probability of the December increase is now below 50%.

 

Chart at a Glance

India inflation

Source: Bloomberg LP

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Gold Stocks' Corner Office Catalyst https://www.vaneck.com/blogs/gold-and-precious-metals/gold-stocks-corner-office-catalyst/ A reinvented gold industry, with companies with lower debt and the ability to generate free cash flow, could help spark interest in gold stocks.

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VanEck Blog 7/12/2018 12:00:00 AM

Strong U.S. Dollar Weakens Gold in June

The gold price faced pressure on several fronts in June. The dominant headwind was the U.S. dollar, as the US Dollar Index (DXY)1 reached new highs for the year. The synchronized global growth theme that markets were counting on early in the year faded as economic indicators from Europe and many emerging markets have failed to keep pace with those in the U.S. Additional demand for dollars is coming from U.S. government policies, where the Treasury is issuing increasing quantities of debt to fund tax cuts and spending, and the Fed is selling down its hoard of government securities.

Impact of Trade and Tariffs Could Support Gold

Gold was also caught in the June metals selloff. Copper and zinc suffered sharp falls amid concerns that the Trump administration’s tariff policies will likely dampen demand. While trade policies have adversely affected a number of companies, there is not yet evidence that they are affecting the broader economy or creating additional inflationary pressure. We believe gold will not react positively unless markets see this broader systemic risk emerge. Harley-Davidson announced plans to move some production to its local markets to avoid tariffs. This might become the start of a trend that places the global economy at risk. The Wall Street Journal found that a car costs 50% more in Brazil than a comparable model does in Mexico due to Brazilian protectionist rules that require cars to be assembled in country. Also, the strong U.S. dollar and stimulative fiscal policies are creating import demand that might be temporarily masking the adverse effects of tariff policies.

Gold Stocks Have Outperformed Gold Since February

Finally, the Fed raised rates for the second time this year on June 13 and upped its guidance to four rate increases in 2018. This lent additional strength to the U.S. dollar, putting pressure on gold. During June, gold fell $45.35 (3.5%), ending the month near its low for the year at $1,253.17 per ounce. Gold stocks outperformed gold in June, as the NYSE Arca Gold Miners Index (GDMNTR)2 and the MVIS Global Junior Gold Miners Index (MVGDXJTR)3 both fell 0.2%.

Gold and gold stocks have shown similar performance in the first half of 2018. Gold declined 3.8%, while the GDMNTR fell 4.0% and the MVGDXJTR declined 4.4%. The gold price was held in check by a lack of macroeconomic catalysts and the strength of the U.S. dollar. Gold stocks significantly underperformed gold early in the year, with the underperformance reaching 10% in February. However, since then, stocks have outperformed to pull even with gold at mid-year.

Following Rate Hike, Gold Could Rally Following July 4th Holiday

The gold price has shown weakness ahead of every Fed rate increase since the hiking cycle started in December 2015. Gold has also rallied immediately after every rate increase, except for two. In June 2017, gold continued to fall after the Fed rate decision, but then rallied following the July 4th holiday week. Again this year, gold continued to fall after the June rate hike and into the week of the holiday. Positioning in the futures market suggests gold is oversold, so we expect to see another delayed rally once the thin holiday trading has passed.

Reinvented Gold Industry Healthy and Competitive Again

We frequently explain to investors how the gold mining industry has reinvented itself after years of mismanagement. The chart shows that the return on invested capital (ROIC) for senior gold companies fell below industry peers from 2012 to 2015. ROIC has since risen to historic norms and is again competitive. A number of factors have contributed to the gold industry’s turnaround.

With Improved ROIC, Gold’s Again Competitive with Other Industries

Comparison of ROIC across the gold, energy, industrials, and materials industries

Source: CapIQ; CIBC World Markets Inc. Report as of May 30, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

Balance sheets are healthy again. CIBC World Markets finds net debt levels have fallen from $31 billion in 2014 to $17 billion in 2017, and we expect them to continue to fall. Mining costs have declined roughly 25% since 2012. Adoption of new technologies should allow costs to remain low. Free cash flow yields are expected to rise from 1.8% in 2018 to 8.1% in 2020, assuming a $1,300 per ounce gold price. Companies have recalibrated their portfolio of mines to focus on properties where they can create the most value. They have also become much better at hitting their targets. RBC Capital Markets found that in 2012, 60% of companies achieved production guidance and less than 50% delivered on original cost guidance. In 2017, production and cost guidance were achieved by 76% and 79% of companies, respectively.

Lasting Management Changes Key to Rekindling Investor Interest

Gold equity valuations are attractive, yet few investors are interested in gold stocks in the current environment. In order to attract investors in the next cycle, we feel companies must show that all of these changes are fundamental and lasting, rather than window dressing to cope with low gold prices. We believe there have been several fundamental changes that insure that wasteful management practices are gone for good:

  • Management incentives have changed substantially at the board level. Historically, incentives were centered on production growth. However, it has become very difficult for large gold companies to generate growth and shareholder returns simultaneously. Returns suffered as the quality of gold deposits have declined and costs to develop have increased. Recently boards have restructured incentives to focus on returns rather than growth. As a result, managements are finding innovative ways to mine efficiently and build projects that contribute more to the bottom line.
  • We expect shareholders to be more vigilant in holding managements accountable. The bear market from 2011 to 2015 was the worst peak to trough performance ever for gold equities. Investors have scars that will not be forgotten as the gold price improves. A recent example of shareholder involvement is Detour Gold (0% of net assets*), who operates the largest open pit gold mine in Ontario, Canada. A June Bloomberg article shows many of the company’s largest shareholders are unhappy with management. A letter to the company that was made public states that directors had “failed to recruit and oversee a management team capable of operating the Detour Lake mine in a manner that delivers returns to shareholders.”
  • Passive gold equity funds have changed the structure of capital formation. In 2011, assets under management (AUM) by dedicated precious metals equity funds was divided 94% active (mainly mutual funds) versus 6% passive (ETFs). CIBC estimates the split is now 33% active and 67% passive. AUM of the 17 active gold equity funds in the U.S. listed on Bloomberg totals $10.5 billion, while the gold equity ETF’s VanEck Vectors® Gold Miners ETF (GDX) and VanEck Vectors® Junior Gold Miners ETF (GDXJ) alone have AUM of $12.3 billion. Passive funds are not able to participate in secondary offerings or initial public offerings (IPOs). This reduced pool of active funds means the industry has fewer options when it comes to raising capital. We believe companies have no choice but to become more fiscally disciplined to generate funding internally.

We will soon see if the gold price again shows positive moves following the July 4th holiday week. We continue to believe gold may take another run at the $1,365 per ounce level that has served as the price ceiling since 2014. A successful test of this level is probably needed to bring investor interest back to gold stocks.

Download Commentary PDF with Fund specific information and performance

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Real Assets: Headwinds Turn to Tailwinds https://www.vaneck.com/blogs/allocation/real-assets-headwinds-turn-to-tailwinds/ The current economic growth and heightened inflation expectations provide an ideal backdrop to consider real assets and their potential benefits.

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VanEck Blog 7/12/2018 12:00:00 AM

To many market observers, the first quarter of 2016 marked the low point for sectors commonly associated with real assets. Stagnant global growth, oversupplied commodities markets, a strong U.S. dollar, and natural resource companies with bloated balance sheets overridden by enormous debt all combined to create tremendous headwinds that obscured the potential benefits of adding real assets to an investment portfolio.

But in recognizing the bottom in a cycle, the key now is to appreciate that a recovery across these sectors has occurred. The recent environment, characterized by economic growth and heightened inflation expectations, provides an ideal backdrop for investors to consider real assets and their potential benefits. Although global growth has slowed over the last several weeks, now could be a good opportunity given that markets have likely already priced in this onslaught of negative news without any concrete indications of a long-term, detrimental impact.

The Winds Are Shifting

Inflation is something that has not been seen in well over a decade, but the ingredients are there: a strong U.S. economy, unemployment at historic lows, and the recent stimuli of tax reform, deregulation, and government spending, which may not even have fully taken hold yet. Plus, recent indications from the Fed continue to indicate a potentially more aggressive approach to tightening.

Meanwhile, although it may be slowing, global growth has improved over the short-term, and despite some uncertainty around tariffs and global trade, supply/demand dynamics across many commodities are back in balance and look to become even more favorable in the near future. Plus, companies across many of the primary industries associated with real assets are now in improved financial and operational shape after several years of restructuring to reduce capital expenditure and improve overall efficiency.

As the headwinds are likely to continue to dissipate, the potential benefits of real asset investing are coming into clearer focus. Notably, an allocation to real assets can be used to help investors enhance portfolio diversification, gain exposure to global growth, and hedge against the impact of inflation. As the current environment progresses, it is a good time to consider the impact of inflation and an allocation to real assets.

The Current Case for Real Assets

Historically, periods of heightened inflationary pressures have provided a strong backdrop for real assets. An even more supportive scenario occurs when synchronized global growth coincides with inflation, much like what has occurred recently. Inflation has not been a strong consideration for some time, so many investors have remained overweight to traditional asset classes.

Returns Across Growth/Inflation Scenarios

Real assets returns across growth and inflation scenarios

Source: Bloomberg; FactSet; FRED; IMF; VanEck. Data as of December 31, 2017. Analysis based on quarterly data from September 1990 to December 2017 with average return values (above) expressed as whole numbers. “+/- Growth” represented by time periods where year-over-year OECD real GDP growth increased (“+”) or decreased (“-“) from the previous quarter. “+/- Inflation” represented by time periods where realized U.S. inflation, as measured by U.S. CPI – All Items, was greater than (“+”) or less than (“-“) one-year-ahead inflation expectations, as measured by University of Michigan’s Inflation Expectations Survey. Asset class representations for “Natural Resources”, “Commodities”, “International (Int’l) Equities”, “Infrastructure”, “REITs”, “U.S. Equities”, and “U.S. Bonds” provided below. Past performance is not indicative of future results. This information is being provided for informational purposes only.

Despite the potential benefits, the inherent volatility of real assets remains a concern for many investors. Commodities, which are typically associated with real assets, have historically experienced fewer and shorter moderate declines than global equities, yet they have more instances and longer periods of extreme declines.

We believe that a diversified strategy with the flexibility to adapt to changing market conditions may present an attractive opportunity. A diversified approach has historically helped reduce the risk of individual real asset sectors and resulted in a similar drawdown with less volatility relative to U.S. equities.

Commodities Have Had More Significant Drawdowns Than Other Asset Classes1 (1975 – 2017)

  Declines of 10% - 20% Declines of 20% or more
Asset Class Total declines Average length Total Declines Average length
Commodity Futures 6 49 Days 10 976 Days
U.S. Equities 9 163 Days 3 641 Days
International Equities 8 74 Days 5 605 Days
U.S. Aggregate Bonds 1 182 Days 0

Source: Morningstar. Data as of December 31, 2017. Past performance is no guarantee of future results. Investors cannot invest directly in an index. See important disclosures, index descriptions, and definitions on last page.

 

A Mix of Real Assets Reduces Risk Similar to U.S. Equities2 (2008 - 2017)

Real Asset Sectors Standard Deviation Max. Drawdown
Natural Resource Equities 23.6% -56.4%
Commodities 17.7% -69.0%
REITs 36.6% -68.4%
Global Infasturcture 17.6% -55.7%
MLPs 24.9% -58.2%
Diversified Real Assets Blend 17.7% -52.7%
U.S. Equities 20.7% -52.5%

Source: FactSet. Data as of December 31, 2017. Diversified Real Assets Blend is represented by the Blended Real Assets Index, the VanEck Real Asset Allocation Strategy’s benchmark, an equally weighted blend of Bloomberg Commodity Index. S&P Real Assets Equity Index, and VanEck® Natural Resources Index. Equal weightings are reset monthly. The Blended Real Asset Index is an appropriate benchmark because it represents the various real assets investments considered by the Fund, covering natural resources equities, MLPs, infrastructure, real estate, and commodity futures. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

The actively managed VanEck Vectors® Real Asset Allocation ETF (RAAX) offers investors the ability to access the potential benefits of real assets. By offering potential exposure across commodities, natural resource equities, REITs, MLPs, and infrastructure, with the ability to allocate up to 100% to cash and cash equivalents during market stress, RAAX helps address the impact of volatility long associated with real asset investing through a process that responds to changing market environments.

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Turkey Current Account in Tailspin https://www.vaneck.com/blogs/emerging-markets-daily/turkey-current-account-in-tailspin/ Today’s focus is on emerging markets fragilities, including the consequences of toxic policies in Turkey, Argentina’s monetary policy adjustments, and China spillovers.

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VanEck Blog 7/11/2018 12:00:00 AM

Today’s focus is on emerging markets fragilities, including the consequences of toxic policies in Turkey, Argentina’s monetary policy adjustments, and China spillovers.

Turkey continues to reap the “benefits” of its past pro-growth policies – in the form of both high inflation and the widening current account gap, which reached USD5.89B in May (significantly more than expected). The quality of deficit financing is also concerning, with falling foreign direct investments and the need to draw on international reserves. Going forward, higher borrowing costs in the economy should help to mitigate some risks (provided there is no additional fiscal stimulus). However, correcting the deficit of 6.5-6.6% of GDP is likely to require a significantly weaker currency (i.e. well beyond today’s 154bps drop, according to Bloomberg LP as of 9:50 a.m.).

The Chinese yuan gapped weaker this morning after the U.S. unveiled a USD200B tariff list. The “what’s next” question is on everybody’s mind. This includes China’s policy response (especially if the U.S. Dollar strengthens further – check today’s spike in the U.S. producer prices!) and potential spillovers into other emerging markets. On the policy front, China’s declining reserve adequacy might limit room for outright currency interventions. Regarding spillovers, note that the yuan’s 90-day correlation1 with other Asian currencies is peaking again (see chart below) and that the yuan’s correlation with Central European currencies also looks elevated. Latin American currencies, the Turkish lira, and the South African rand showed some immunity up to now, due to strong idiosyncratic drivers, but one can argue that there is significant room for catching up.

Argentina’s monetary policy is evolving in a very interesting direction. We are talking about the central bank’s decision to start monitoring monetary aggregates in addition to using the traditional interest rate tools. The reason for the change is that the transmission mechanism had not been working very well, and inflation expectations continued to grind higher despite a massive increase in the base rate. Targeting monetary aggregates might help to better control domestic activity (and, potentially, foreign exchange rates). However, there is a risk of greater interest rate volatility, so we are waiting for more details on implementation.

 

Chart at a Glance

Chinese yuan 90-day correlation with other emerging market currencies

Source: VanEck; Bloomberg LP

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Turkey’s Policy Takes Dangerous Turn https://www.vaneck.com/blogs/emerging-markets-daily/turkeys-policy-takes-dangerous-turn/ Stronger inflation signs are appearing in emerging markets, with Turkey particularly exposed due to deficient policies.

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VanEck Blog 7/10/2018 12:00:00 AM

Stronger inflation signs are appearing in emerging markets, with Turkey particularly exposed due to deficient policies.

Turkey’s new cabinet lineup destroyed any residual hope that politics will stop dominating policy after the elections. With market-friendly officials gone and President Recep Tayyip Erdogan’s son-in-law, Berat Albayrak, appointed Minister of Finance, the pro-growth drive is likely to continue in the foreseeable future, keeping inflation pressures high and pushing fiscal and current account deficits wider. Meanwhile, changes to the central bank law lower the probability of a meaningful or orthodox response on the monetary policy side. The market reaction showed an element of surprise. The currency gapped approximately 300bps weaker after the announcement yesterday, and rates and equities are catching up this morning.

We are seeing more signs that the inflation outlook in emerging markets (EMs) is becoming less benign. Yesterday’s upside surprise in Mexico was followed by a big jump in Russia’s inflation expectations (from 8.6% in May to 9.8% in June). Hungary’s headline Consumer Price Index (CPI) breached the central bank’s target in June, accelerating to 3.1% year-on-year, and China’s producer prices beat consensus, rising to 4.7% year-on-year last month. Just to clarify: the situation is far from critical in most EMs (aggregate EM inflation is the lowest in years). However, it gives central banks an extra reason to err on the hawkish side, with EM growth being likely collateral damage.

Today’s activity releases in Europe and the U.S. look fully in line with the “less synchronized global growth” narrative. The small business survey in the U.S. continued to look exceptionally strong (especially compensation plans – see chart below), while July’s Centre for European Economic Research (ZEW) survey in Germany disappointed big time, pushing the euro down by 36bps vs. U.S. Dollar (as of 10:00am ET, according to Bloomberg LP). There are several data and policy cliffhangers in the coming days – including U.S. inflation and U.S. Federal Reserve Chairman Jay Powell’s testimony in the Senate – with room for higher volatility in both currency and rates.

 

Chart at a Glance

U.S. small business survey

Source: Bloomberg LP

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Mexico Disinflation: New Doubts Emerge https://www.vaneck.com/blogs/emerging-markets-daily/mexico-disinflation-new-doubts-emerge/ Emerging markets policy responses are in question as inflation pressures reemerge.

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VanEck Blog 7/9/2018 12:00:00 AM

The daily emerging markets commentary offers brief analysis of key events impacting emerging markets bonds, from monetary policy decisions and economic releases to currency movements.

Emerging markets policy responses are in question as inflation pressures reemerge.

Mexico’s inflation releases this morning offer food for thought. Both headline and core Consumer Price Indices (CPI) exceeded expectations in June with the former accelerating to 4.65% year-on-year on the back of higher food and gasoline prices (see chart below). Today’s numbers should be considered in the context of incoming Secretary of Finance Carlos Urzúa’s recent remark that next year’s inflation can be around 4-5%, which is above the 3% target and raises a question mark about the sustainability of the current disinflation trend. For now, markets appear relaxed, barely pricing in one full hike (21bps) in the next six months.

The Turkish lira made a big turnaround this morning – first rallying by 130bps and then giving it back following reports about post-election changes in the central bank law, which stipulate that deputy governors can be appointed without the central bank governor’s recommendation. The minimum experience and 5-year term clauses appear to be goners as well. Emotions are running high as Turkey is expected to unveil its new cabinet lineup later today. The new central bank law sends a very negative signal regarding authorities’ willingness and ability to address worsening macroeconomic imbalances.

China’s latest international reserves print was uneventful (thankfully). Both the headline and valuation-adjusted reserves barely moved in June, with the former registering USD3.112T. The release is indicative of limited FX interventions (at least through official channels), and it looks consistent with the Chinese yuan’s weakening in the second half of June. Today’s print notwithstanding, China’s reserve adequacy continues to deteriorate adding to uncertainty about the People’s Bank of China’s policy choices in case of renewed currency pressures.

 

Chart at a Glance

Mexico inflation

Source: Bloomberg LP

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Brazil’s Inflation Risks Resurface https://www.vaneck.com/blogs/emerging-markets-daily/brazil-inflation-risk-resurface/ ]]> VanEck Blog 7/6/2018 12:00:00 AM

There are positive signals for global growth transmission, but also new emerging markets-specific risks.

The June spike in Brazil’s inflation (see chart below), bringing it to 4.39% year-on-year, was completely predictable as it came on the heels of the truck drivers’ strike. As such, we are unlikely to see an immediate policy response from the central bank, though there are several risk factors to watch going forward. A sharp increase in the diffusion index1 (to an estimated 65.5%, the highest since early-2016) shows that the price pressures were widespread. There are also potential second-round effects associated with the past weakness of the Brazilian real (down 18.6% since March). It is, therefore, hardly surprising that markets continue to price in 52bps of tightening for August-September.  

The first round of U.S. tariffs on USD34B of China’s goods went into effect today. This was expected – as was China’s reciprocal move – hence a very muted market reaction. The next USD16B round of tariffs should kick in two weeks later, giving the market plenty of time to focus on China’s macro releases – including the international reserves release this weekend. The reserves are still large in absolute terms, but their adequacy had eroded to the point that they are no longer sufficient according to one of the four metrics used by the International Monetary Fund. The consensus expects only a tiny reserves’ decline in June – any negative surprises might place China back on the list of potential emerging markets risks.  

Markets reacted with a risk-on rally to the U.S. labor market report, which was surprisingly strong given the economy’s place in the business cycle. The non-farm payrolls beat consensus at 213K (which means an accelerating year-on-year growth rate!), while an uptick in the unemployment rate to 4% was most likely due to a higher participation rate. Overall, this is a good set of numbers as regards to the global growth transmission mechanism (including emerging markets), but there are still no signs of inflation/wage pressures.

 

Chart at a Glance

TBrazil Inflation

Source: Bloomberg LP

1 Diffusion index is a measure of the degree to which different indicators change in the same way over a particular period of time.

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Mexico’s Fundamentals Keep Improving https://www.vaneck.com/blogs/emerging-markets-daily/mexico-fundamentals-improving/ The policy tightening narrative in emerging markets is getting stronger.

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VanEck Blog 7/5/2018 12:00:00 AM

The policy tightening narrative in emerging markets is getting stronger.

The market may have concerns about the post-election policy direction in Mexico, but the domestic activity momentum keeps on strengthening. Today’s consumer confidence and fixed investment prints surprised convincingly to the upside, with the latter surging to a multi-year high of 10.5% year-on-year in April. These are very good signs as regards to the fundamental support for the Mexican peso - albeit uncertainties about the new government’s fiscal math may affect sentiment.

We see a lot of inflation red flags in emerging markets this morning, most of which support the narrative about more policy tightening in that part of the world. The headline inflation surge in the Philippines (5.2% year-on-year in June, way above the 4% target) paves the way for a rate hike in August. A big jump in Argentina’s inflation expectations (to 30% for 2018 and above the International Monetary Fund program targets for 2019 and 2020) indicates that the policy rate is unlikely to go below 40% anytime soon.1 Turkey, however, is a different story. Prime Minister Binali Yildirim’s remark about prioritizing lower rates is alarming in the context of the latest inflation print. It threatens to weaken the central bank’s policy response (and credibility).

The U.S. continues to lead the global growth “peloton” for now. However, there are signs that the momentum might be slowing. The ADP National Employment Report’s change for June (an increase of 177K private sector jobs) came in below expectations, raising some questions about tomorrow’s jobs report. A growth slowdown in the U.S. may have negative potential implications for many emerging markets - hence our interest and concern.

 

1 Source: Bloomberg

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Turkey Inflation Surge Hurts Credibility https://www.vaneck.com/blogs/emerging-markets-daily/turkey-inflation-surge-hurts-credibility/ The continuation of current policies are under question in key emerging markets.

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VanEck Blog 7/3/2018 12:00:00 AM

The continuation of current policies are under question in key emerging markets.

A pretty horrific inflation print for June sent the Turkish lira plummeting this morning (down 136bps as of 10:10 a.m. ET, according to Bloomberg LP). Headline inflation surged to 15.39% year-over-year and core to 14.60% (see chart below), exceeding expectations by a wide margin. Inflation is now back to the levels last seen in 2003, making a big dent in the central bank’s credibility. Meanwhile, moderating domestic activity suggests that the government’s stimulus might be extended – and this would mean more inflation pressures down the road.

The Chinese yuan’s movements remain firmly in focus following what looked like the central bank’s verbal intervention and the currency’s subsequent recovery (up 33bps as of 10:10 a.m. ET, according to Bloomberg LP). An important question is whether the yuan’s weakness will affect some key aspects of the government’s policy framework, including deleveraging. The latter encouraged more external borrowing, causing a sharp rebound in the “other investments” items of the balance of payments (BOP), which comprises loans and trade credits (among other things). This BOP item is particularly sensitive to the exchange rate movements – and its potential reversal would leave China’s overall BOP (and reserves!) in a weaker position. Today’s headlines about the government focusing more on “structural deleveraging” sure look interesting against this background.

A nice 4th of July surprise from U.S. factory orders and the below-consensus retail sales in the Eurozone seem to agree with the narrative about the U.S.’ relative outperformance in the less-synchronized world (growth-wise). U.S. factory orders rebounded more than expected in May (up 9.2% year-on-year), staying well above the multi-decade average and supporting market expectations of the Fed’s rate hike in September (78.8% implied probability).

 

Chart at a Glance

Turkey inflation, year over year

Source: Bloomberg LP

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Ease EMFX Volatility with an Aggregate Strategy https://www.vaneck.com/blogs/emerging-markets-bonds/ease-emfx-volatility-aggregate-strategy/ As emerging markets debt volatility continues, we look at an aggregate approach combining sovereign and corporate bonds across hard and local currencies.

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VanEck Blog 6/29/2018 12:00:00 AM

The emerging markets sell-off has continued in recent weeks, as the U.S. dollar remains strong amid domestic economic data that supports a case for higher U.S. interest rates. Many emerging markets local currencies have been severely impacted, particularly those of more vulnerable countries and where political risk is rising.

While we believe that value can now be found in various aspects of the emerging markets debt universe and that the local currency space may become the most attractive opportunity of all, the spike in volatility may prevent certain investors from adding to or initiating allocations. For these investors, we believe that a blended approach combining emerging markets sovereign and corporate bonds across hard and local currencies may present an attractive alternative.

Although an all hard currency allocation can mean avoiding local exposure altogether, hard currency sovereign debt has performed similarly to local sovereign bonds year-to-date. Allocating to the entire investable opportunity set means approximately 64% exposure to hard currency and 36% exposure to local currency bonds. This diversification may potentially help reduce the volatility and drawdowns associated with local currencies, while offering exposure to their higher potential yields, lower historical correlation to the interest rates of developed markets, and the potential to benefit from currency appreciation. Further, the performance of emerging markets corporate bonds and sovereign bonds can vary greatly in a given year, in part due to a diverse geographic makeup and a broad sector mix that can respond differently to various macroeconomic environments.

Based on index data over the past several years, an aggregated approach to investing in emerging markets has generated significantly lower volatility compared to a local currency exposure, which saw significant drawdowns in 2014 and 2015. On the other hand, the aggregated approach benefitted from its local currency allocation in 2017, outperforming both hard currency emerging markets sovereign and corporate bonds. Year-to-date, the aggregate index has benefitted from an approximately 42% exposure to corporate bonds, which have outperformed hard currency sovereign bonds, albeit with moderately negative returns.1

Returns for Emerging Market Bonds Can Diverge Significantly

Emerging market bond returns

Source: MVIS. Data as of June 28, 2018. Past performance is no guarantee of future results. Index returns are not representative of fund returns. For fund returns current to the most recent month-end visit vaneck.com. See definitions and descriptions below.

The benefits of an emerging markets aggregate bond exposure may explain the increasing flows into these strategies. According to J.P. Morgan, strategies which blend corporate and sovereign exposure took in approximately $35 billion in 2017, a similar level to sovereign focused emerging markets strategies. Longer term, flows have gradually increased and cumulatively have taken in the same amount as local currency strategies since late 2009.2

We believe that a passive blended strategy warrants attention, given the index’s track record relative to actively managed peers, as well as the low cost and transparent nature of index-based strategies. Although diversification and tradability are fundamental to virtually any passive strategy, we believe these elements should be given particular emphasis when investing in emerging markets debt due to the potential concentration risk of many active strategies and the importance of maintaining liquidity and low transaction costs, particularly in stressed market environments.

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Real Assets Outlook Remains Strong https://www.vaneck.com/blogs/allocation/real-assets-outlook-remains-strong/ VanEck Vectors Real Asset Allocation ETF (RAAX) holds steady and remains fully invested amid supportive market conditions for real assets.

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VanEck Blog 6/27/2018 12:00:00 AM

The VanEck Vectors Real Asset Allocation ETF (RAAX) uses a data-driven, rules-based process that leverages over 50 indicators (technical, macroeconomic and fundamental, commodity price, and sentiment) to allocate across 12 individual real asset segments in five broad real asset sectors. These objective indicators identify the segments with positive expected returns. Then, using correlation and volatility, an optimization process determines the weight to these segments with the goal of creating a portfolio with maximum diversification while reducing risk. The expanded PDF version of this commentary can be downloaded here.

May Performance Summary

In May, the VanEck Vectors Real Asset Allocation ETF (RAAX) was fully invested across commodities, natural resource equities, and Master Limited Partnerships (MLPs) with a 35% allocation to natural resource equities, a 30% allocation to both diversified commodities and gold (bullion and gold equities), and a 5% allocation to MLPs.

RAAX returned +0.89% in May versus +1.24% for its benchmark, the Blended Real Asset Index, which is comprised of an equally weighted blend of the returns of Bloomberg Commodity Index, S&P Real Assets Equity Index, and VanEck® Natural Resources Index. Equal weightings are reset monthly.

 

Average Annual Total Returns (%) as of May 31, 2018
  1 Mo YTD 1 Year Life
(04/09/18)
RAAX (NAV) 0.89 - - 3.89
RAAX (Share Price) 0.38 - - 3.65
Blended Real Asset Index* 1.24 - - 3.56

Average Annual Total Returns (%) as of March 31, 2018
  1 Mo YTD 1 Year Life
(04/09/18)
RAAX (NAV) - - - -
RAAX (Share Price) - - - -
Blended Real Asset Index* - - - -

The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the ETF incurred all expenses and fees, investment returns would have been reduced. Investment returns and ETF share values will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. ETF returns assume that distributions have been reinvested in the Fund at NAV.

Returns less than a year are not annualized.

Expenses: Gross 0.81%; Net 0.74%. Expenses are capped contractually at 0.55% through February 1, 2020. Expenses are based on estimated amounts for the current fiscal year. Cap exclude certain expenses, such as interest, acquired fund fees and expenses, and trading expenses.

RAAX’s positioning across real asset segments did not change drastically in June. Of note, RAAX now has a small exposure to global metals and mining equities after having no exposure in May.

In general, strong economic growth and rising inflation are contributing to higher real asset prices, while sharply higher interest rates are causing increased volatility in other asset classes. Gold bullion and gold equities are providing stability during geopolitical turbulence. Technical, commodity price, sentiment, and macroeconomic/fundamental indicators are supportive of higher prices for most real assets

A Closer Look at the What, When, and How

RAAX helps investors with the what, when, and how of real asset investing, including: (1) what to own; (2) when to be invested; and (3) how to allocate. Decisions are made on a monthly basis using our rules-based, quantitative allocation process. RAAX only invests in asset classes that the model is bullish on. The weightings themselves are not an indication of conviction but are instead determined by RAAX’s optimization process, which seeks to maximize diversification and minimize volatility.

Real Asset Segment View Rationale
Agribusiness Equities Bullish Bullish price trends in both the equities and commodities, ordinary equity volatility, and postive economic factors. The large allocation is due to the diversification benefits of the asset.
Coal Equities Bearish Cautious due to bearish price trends and weak economic data.
Global Infrastructure Bearish Cautious due to weak price trends.
Gold Bullion Bullish Strong price trends, low volatility, and favorable sentiment readings. The large allocation is due to the diversification benefits of the asset.
Gold Equities Bullish Strong commodity price trends, ordinary volatility, and favorable sentiment readings.
Diversified Commodities Bullish Strong price trends and ordinary volatility. The large allocation is due to the diversification benefits of the asset.
MLPs Bullish Strong price trends, ordinary volatility, and supportive economic factors.
Oil Services Equities Bullish Strong price trends in equity and oil prices, ordinary volatility, and supportive economic factors.
Unconventional Oil & Gas Equities Bullish Strong price trends in equity and oil prices, ordinary volatility, and supportive economic factors.
Global Metal & Mining Equities Bullish Strong price trends, ordinary volatility, and supportive economic factors.
Steel Equities Bullish Bullish equity and commoditiy prices, and ordinary volatility.
REITs Bearish Cautious due to weak price trends and soft economic factors.

Source: VanEck. Data as of June 1, 2018.

June Positioning

We remain bullish on most real assets. RAAX is fully invested across natural resource equities (38%), diversified commodities (30%), gold bullion and gold equities (27%), and MLPs (5%). Market conditions are supportive of commodities and the portfolio has a 50% allocation (diversified commodity and gold bullion). Currently, there is no exposure to coal equities, global infrastructure, or REITs.

This month we added a 5% allocation to global metals and mining equities, and funded it by reducing the allocations to agribusiness and gold equities. Our bullish position on global metals and mining is based on strengthening macroeconomic/fundamental and commodity price indicators.

Monthly Asset Class Changes

Real Asset Segment Jun-18 May-18 Change from Previous Month
Global Metal & Mining Equities 5% 0% 5% New Position
Diversified Commodities 30% 30% 0% No Change
Gold Bullion 20% 20% 0% No Change
Master Limited Partnerships 5% 5% 0% No Change
Oil Service Equities 5% 5% 0% No Change
Cash 0% 0% 0% No Change
Unconventional Oil & Gas Equities 5% 5% 0% No Change
Steel Equities 5% 5% 0% No Change
REITs 0% 0% 0% No Change
Global Infrastructure 0% 0% 0% No Change
Coal Equities 0% 0% 0% No Change
Agribusiness Equities 18% 20% −2% Decrease
Gold Equities 7% 10% −3% Decrease

Source: VanEck. Data as of June 1, 2018. Past performance is not indicative of future results.

Additional Resources

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Cautious Buy-Furcation https://www.vaneck.com/blogs/allocation/cautious-buy-furcation/ Diverging stock performance across regions leads to cautious stock allocation in June, decreasing to 72%.

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VanEck Blog 6/25/2018 12:00:00 AM

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

Performance and Positioning

The VanEck NDR Managed Allocation Fund (the “Fund”) returned +0.49% versus +0.41% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) in May. The Fund held an 83% allocation to stocks, and this overweight stock positioning* detracted from performance, while the performance of the regional equity positioning, primarily the U.S. and the Emerging Markets, was mixed.

Total Returns (%) as of May 31, 2018
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
0.49 -1.33 5.68 9.10
Class A: Maximum 5.75% load -5.30 -7.01 -0.38 6.01
60% MSCI ACWI/
40% BbgBarc US Agg.
0.41 -0.30 7.23 9.32
Morningstar Tactical Allocation
Category (average)1
1.02 -0.59 6.29 7.87

Total Returns (%) as of March 31, 2018
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
-0.99 -1.50 8.69 9.85
Class A: Maximum 5.75% load -6.69 -7.17 2.45 6.46
60% MSCI ACWI/
40% BbgBarc US Agg.
-0.99 -1.02 9.63 9.78
Morningstar Tactical Allocation
Category (average)1
-0.89 -1.62 7.09 7.99

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

Returns less than a year are not annualized.

Expenses: Class A: Gross 2.33%; Net 1.39%. Expenses are capped contractually until 05/01/19 at 1.15% for Class A. Caps excluding acquired fund fees and expenses, interest, trading, dividends, and interest payment of securities sold short, taxes, and extraordinary expenses.

In June, the Fund's stock allocation decreased to 72%. The bond allocation increased to 26.3%, and there was a 2% allocation to cash. Diverging stock performance across regions lead to a more cautious stock allocation:

  • Technical indicators, in aggregate, point to higher stock prices
  • Sentiment is optimistic for stocks
  • Valuations are expensive
  • Macroeconomic global growth is strong, but PMI growth has been slowing. Global central banks remain accommodative

 

Asset Class Positioning vs. Neutral Allocation, June 2018

Asset Class Positioning vs. Neutral Allocation, June 2018

Source: VanEck. Data as of June 2018.

Weight-of-the-Evidence in Focus

The world is bifurcating, and the stock market is taking notice. The list of geopolitical risks that have dominated the headlines recently continues to grow and includes fears of trade wars, the U.S. pulling out of the nuclear weapons agreement with Iran, relations between the U.S. and North Korea, and credit risk fears in Italy.

Stock prices have been diverging across equity regions. The U.S. market returned +2.54% in May while developed Europe and the Emerging Markets returned -3.94% and -3.59%, respectively. Much of the performance in those regions can be attributed to the strengthening U.S. dollar, which advanced 1.65% in May relative to other currencies.

The model is interpreting the nonconformity in stock returns across the globe as a sign to be cautious. This divergence is captured by the NDR Global Breadth indicator. This indicator measures the percentage of countries participating in a market rally by trading above their intermediate-term moving average. Generally speaking, greater participation equals a healthier trend in the markets. As you can see from the chart below, less than 50% of countries are now trading below their intermediate-term moving average. Over the long-term, this has historically been a bearish sign for stocks.

While the weight-of-the-evidence remains bullish, weakening global breadth caused us to reduce our equity allocation from 83% to 72%.

% of MSCI ACWI Markets Above 50-Day Moving Average

% of MSCI ACWI Markets Above 50-Day Moving Average

Source: Ned Davis Research. Data as of May 31, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

May Performance Review

In May, the Fund held an 83% allocation to stocks, a 16.5% allocation to bonds, and a near 0% allocation to cash. This overweight stock positioning detracted from performance as global stocks returned +0.12% and bonds returned +0.71%.

The performance of the regional equity positioning was mixed. The largest overweight positions were the U.S. (+12.76% overweight) and the Emerging Markets (+5.55% overweight). U.S. stocks returned +2.82% which aided performance. However, Emerging Market stocks underperformed with a return of -3.54%.

Within the U.S., the Fund was overweight large-cap growth and value, and neutral small-cap growth and value. This positioning was not a big driver of relative performance. Growth outperformed value and small-cap outperformed large-cap.

NDR Indicator Summary, June 2018

NDR Indicator Summary, June 2018

Source: Ned Davis Research. Data as of May 31, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Additional Resources

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Fallen Angels React to Rising Rates and Tariffs https://www.vaneck.com/blogs/etfs/fallen-angel-bonds-rising-rates-geopolitics/ While key drivers of fallen angel bond have been offsetting one another year to date, U.S. interest rate normalization and geopolitical environment have been major influences.

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VanEck Blog 6/22/2018 12:00:00 AM

Fallen angel bonds are feeling the influence of U.S. monetary policy and the geopolitical environment. Credit quality and sector weights have been key performance drivers so far in 2018 while somewhat offsetting one another. Fallen angel bond performance is mainly driven by higher average credit quality, sector differentiation, and potential value from discounted bonds as they are downgraded to high yield status.

Fallen angel bonds underperformed the broad high yield bond market1 by 0.5%, as of May 31, 2018 (-1.2% vs. -0.7%, respectively). After a strong start in January, their current 74% concentration in BB-rated bonds2 and associated interest rate duration3 proved challenging in the face of the Federal Reserve’s tightening monetary policy. Instead the lower duration, lower correlation single-Bs and CCCs have been the high yield outperformers since the end of 2017. Top fallen angel sector contributors year to date have been the overweight in energy and underweight in media. Main detractors have been positions and overweights in the basic industry (e.g., materials) and telecom sectors.

Higher Credit Quality

Credit spreads remain near multi-year lows at 363 points4, ending May only 5 points wide versus the start of the year. Meanwhile, the U.S. 10-year interest rate broke through 3% in April – a high not seen since 2011. The more comparable rate for high yield bonds is the U.S. 5-year interest rate, which was up 46 basis points year to date at 2.66% and closing as high as 2.93% – a level not seen since 2009.

In this environment of modest overall moves in credit spreads and consistently rising interest rates, fallen angels’ higher quality composition has weighed on returns. However, when credit markets have deteriorated – i.e., when credit spreads widened significantly – the higher average BB-concentration has also historically resulted in less downside than the broader high yield bond market with its average 40% BB-concentration.

Fallen Angel High Yield Bonds Offered Less Downside When Credit Markets Deteriorated

Fallen Angel High Yield Bonds vs Broad High Yield Bonds When Credit Markets Deteriorated

Source: FactSet. Data as of May 31, 2018. 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 disclosures below. Blue and orange shading represents annual change in credit spreads. Credit spreads presented are the option adjusted spreads between high yield bonds and their comparable U.S. treasuries.

While not always the case, fallen angel bonds have tended to outperform the broad high yield bond market, on average, in calendar years when credit spreads widened meaningfully, as well as in the subsequent recovery periods. The chart above shows fallen angel bonds outperforming broad market high yield bonds three out of the last six calendar years when credit spreads have widened.

This was most acutely seen in 2008, when fallen angels outperformed by 2.6% (-25.8% vs. -28.4%) as credit spreads widened by 1,212 points, and again in 2015 (-3.2% vs. -5.3%) when spreads widened by 191 points. Both 2008 and 2015 are instances that reflected value proposition as a key driver of returns, as these years represented the largest volumes of discounted fallen angel entrants, historically.

During the three calendar years in the chart above when fallen angel bonds underperformed the broad high yield bond market, the average relative return was -1.6%. This compares with the average +3.6% relative return in years with outperformance, helping to illustrate the strategy’s historical effectiveness.

Commodity Sector Bias

Fallen angels’ largest sector overweights relative to the broad high yield bond market are in the basic industry (e.g., materials) and energy sectors. As such, the fallen angel ETF and index tends to have greater sensitivity to commodity price movements.

In May, oil prices reached highs not seen since 2014, making the fallen angel energy sector the top performer year to date. Meanwhile, escalating trade tensions over potential tariff policies have contributed to price declines in materials. Fallen angels’ overweight in the basic industry sector has been the major driver of underperformance relative to the broad high yield bond market year to date.

Outlook

More price volatility in commodity sectors may ensue with increasing or subsiding trade tensions. Oil prices are likely to be responsive in the days leading up to and after the June OPEC meeting, when future output may be determined. However, despite these headline risks, fallen angels’ two largest sector biases may appeal to investors positively disposed to commodities for their potential diversification and pro-inflationary features.

U.S. Treasuries Yield Curve’s Flattening Trend
12/31/2016 – 5/31/2018

U.S. Treasuries Yield Curve's Flattening Trend

Source: FactSet. Data as of May 31, 2018. Past performance is no guarantee of future performance.

The Fed increased rates this month and signaled that additional hikes are coming in the second half of the year, raising concern over the flattening yield curve and its potential implications. Should markets deteriorate and decline, a fallen angel ETF presents a higher quality option for high yield investors to consider. Lower rated high yield bonds have tended to deteriorate more than higher rated high yield bonds when credit spreads widened significantly. In addition, a declining credit market could precipitate new fallen angel entrants, which may present new value opportunities for this strategy.

 

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

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

Source: Morningstar. Data as of March 31, 2018.

Click here to view ANGL performance current to most recent month end.

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. VanEck Vectors Fallen Angel High Yield Bond ETF commenced on April 10, 2012. An investor cannot invest directly in an index. The results assume that no cash was added to or assets withdrawn from the Index. The high yield bond peers category is represented by the Morningstar Open End Funds – U.S. – High Yield Bond category. See index descriptions below.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) received an overall five-star rating within the Morningstar high yield bond category based on total return as of May 31, 2018.6 Past performance is no guarantee of future results. Additional resources and information on VanEck Vectors Fallen Angel High Yield Bond ETF .

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Communication Issues: Telecoms Lead Retreat https://www.vaneck.com/blogs/moat-investing/telecoms-lead-retreat/ International moats were weighed down by telecomm companies in May and could not escape the selloff in Italy. Healthcare pulled down U.S. moats, but several companies stood out for good reason.

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VanEck Blog 6/15/2018 12:00:00 AM

For the Month Ending May 31, 2018

Performance Overview

International moats retreated in May, underperforming the broad international market. The Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index") trailed the MSCI All Country World Index ex-USA in May by roughly 1% (-3.33% vs. -2.31%, respectively). Domestic moat companies, as represented by the Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index"), lagged the S&P 500® Index (1.25% vs. 2.41%, respectively).

International Moats: Failure to Communicate

Telecommunication services companies weighed heavily on the International Moat Index. Telecom Italia (TIT IM, -18.85%) and America Movil (AMXL MM, -15.96%) were two of the Index’s five worst performers in May. Telecom Italia was affected by weaker than expected margins as part of their quarterly earnings results and suffered from the sell-off in the Italian market following debt fears. Samsonite International SA (1910 HK, -24.40%) led negative performers in the Index after accusations of accounting transgressions by activist investors Blue Orca sparked controversy that led to Samsonite’s CEO stepping down. Morningstar analysts believe the firm has properly addressed the accusations and have maintained their fair value estimate for the company.

U.S. Domestic Moats: Health Check

The healthcare sector reversed its fortunes from April to become the Index’s leading detractor in May. Cardinal Health (CAH US, -18.83%), CVS Health Corp. (CVS US, -9.22%), McKesson Corp. (MCK US, -8.92%), and AmerisourceBergen Corp. (ABC US, -8.91%) were all among the bottom performing companies in the Index. On the flip side, several companies stood out in May. Microchip Technology Inc. (MCHP US, +16.86%) revised higher revenue and earnings guidance following the closing of its acquisition of Microsemi. Lowe’s Companies Inc. (LOW US, +15.26%) finally began to see its spring customer traffic increase following a cold start to the season, and Morningstar raised its fair value estimate from $90 per share to $94. The U.S. Moat Index’s only energy company, Cheniere Energy Inc. (LNG US, +14.55%), continues to be well positioned in the current liquefied natural gas environment, performing well in May.

 

(%) Month Ending 5/31/18

Domestic Equity Markets

International Equity Markets

(%) As of 5/31/18

Domestic Equity Markets

International Equity Markets

(%) Month Ending 5/31/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Total Return
Microchip Technology Inc 16.86
Lowe's Companies Inc 15.26
Cheniere Energy Inc 14.55
Veeva Systems Inc Class A 10.31
Guidewire Software Inc 9.71

Bottom 5 Index Performers
Constituent Total Return
Cardinal Health Inc -18.83
Campbell Soup Co -17.51
CVS Health Corp -9.22
McKesson Corp -8.92
AmerisourceBergen Corp -8.91

View MOAT's current constituents
View MWMZX's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Total Return
Nutrien Ltd 10.93
Unicharm Corp 10.74
Beijing Enterprises Holdings Ltd 9.80
Hoshizaki Corp 8.24
Kao Corp 8.24

Bottom 5 Index Performers
Constituent Total Return
Samsonite International SA -24.40
Telecom Italia SpA -18.85
Grupo Aeroportuario del Pacifico SAB de CV Class B -18.02
Banco Bilbao Vizcaya Argentaria SA -16.18
America Movil SAB de CV Class L -15.96

View MOTI's current constituents

As of 3/16/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
McDonald's Corp MCD US
Procter & Gamble PG US
General Mills Inc GIS US
Dominion Energy Inc D US
Campbell Soup Co CPB US
Hershey Foods Corp HSY US
Cheniere Energy Inc LNG US
Microchip Technology Inc MCHP US
Comcast Corp A CMCSA US
Franklin Resources Inc BEN US
PepsiCo Inc PEP US

Index Deletions
Deleted Constituent Ticker
Visa Inc A V US
VF Corp VFC US
Polaris Inds Inc PII US
The Bank of New York Mellon Corp BK US
Veeva Systems Inc A VEEV US
United Technologies Corp UTX US
TransDigm Group TDG US
CBRE Group Inc. CBG US
Bristol-Myers Squibb BMY US
Emerson Electric Co EMR US
Patterson Cos Inc PDCO 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
Beijing Enterprises Holdings Ltd. China
LINE Corp Japan
GEA AG Germany
Unilever United Kingdom
Vodafone Group United Kingdom
Grupo Aeroportuario del Pacifico, Mexico
Sun Hung Kai Properties Ltd. Hong Kong
KION Group AG Germany
SK Telecom Co Ltd South Korea
Genting Singapore Plc Singapore
Koninklijke KPN NV Netherlands
Beijing Capital International Airport Co. Ltd. China
Brambles Industries Ltd Australia
Banco Bilbao Vizcaya Argentaria SA Spain
Rolls-Royce Holdings Plc United Kingdom
CapitaLand Mall Trust REIT Singapore
Uni Charm Corp Japan
Capitaland Ltd Singapore
Symrise AG Germany
Svenska Handelsbanken A Sweden
LafargeHolcim Ltd Switzerland
Hong Kong Land Hldgs Ltd China
Smiths Group United Kingdom
Grifols SA Spain
Seven & I Holdings Co Ltd Japan
Kubota Corp Japan

Index Deletions
Deleted Constituent Country
Cameco Corp Canada
Canadian Pacific Railway Ltd Canada
Enbridge Inc Canada
Cemex SA CPO Mexico
America Movil SAB de CV L Mexico
Embraer S.A. Brazil
Airbus SE France
Sanofi-Aventis France
Luxottica Group SpA Italy
Crown Resorts Ltd Australia
Sonic Healthcare Ltd Australia
Westpac Banking Corp Australia
AMP Ltd Australia
Commonwealth Bank Australia Australia
QBE Insurance Group Ltd Australia
Magellan Financial Group Limited Australia
Inditex SA Spain
Telefonica SA Spain
MGM China Holdings Ltd Hong Kong
Roche Hldgs AG Ptg Genus Switzerland
Elekta B Sweden
Sina Corp (Caymans) China
ENN Energy Holdings Ltd China
DBS Group Holdings Singapore
Overseas-Chinese Banking Singapore
KBC Group NV Belgium

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



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Infrastructure 2018: Still in Decay https://www.vaneck.com/blogs/muni-nation/infrastructure-2018-still-in-decay/ The state of American infrastructure is dire. Despite the urgency and still-low interest rates, states are adopting a conservative approach to financing infrastructure projects.

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VanEck Blog 6/13/2018 12:00:00 AM

On August 1, 2007, as the evening rush hour traffic crawled along Interstate 35W in Minneapolis, Minnesota, the unthinkable happened: the Interstate 35W bridge collapsed into the Mississippi River 64 feet below, killing 13 people and injuring 145.1

Nearly ten years later on February 7, 2017 in Oroville, California, officials evacuated more than 180,000 people after severe erosion on the Oroville Dam—the tallest dam in the U.S.—necessitated emergency releases of Lake Oroville water to avoid catastrophic floods.2 Although a decade apart and in different regions of the country, these events are symptomatic of the slow-motion crisis in American infrastructure that has been unfolding and continues to the present day.

The American Society of Civil Engineers’ 2017 Infrastructure Report Card gave the U.S. a D+, finding nearly 1 in 10 bridges “structurally deficient,” including the bridge that collapsed in Minnesota.3 17% of dams are deemed a “high hazard potential,”4 while U.S. transit systems face a huge rehabilitation backlog to the tune of $90 billion.5 The picture is similarly dismal in other categories such as energy resiliency, ports, rail, and schools.6

American Bridges Are Falling Apart

Chart showing the 10 states with the highest number of structurally deficient bridges

Source: U.S. Department of Transportation Federal Highway Administration. Data as of 12/31/2017.

As a candidate, President Trump famously promised a $1 trillion infrastructure plan, and the White House mentioned figures as high as $1.5 trillion after he took office. When unveiled in February, the administration’s plan called for only $200 billion in federal spending over the upcoming decade, offloading much of the remaining costs to states, local governments, and the private sector in the form of public-private partnerships.7

Despite the urgency of the crumbling infrastructure and the lack of federal funding, state and local infrastructure spending have not increased to address this issue. The opposite is the case: state and local spending on infrastructure as a share of GDP is actually at a 30-year low.8

This historically low state spending is occurring at a time of very low interest rates and anticipated rate hikes by the Fed, which ordinarily should provide strong incentives for states to lock in low rates while they still can to finance infrastructure projects. According to Moody’s, although most states have plenty of room to run up their debts (with the notable exception of Illinois), they are choosing not to do so, exercising an unusual amount of fiscal restraint, especially given the infrastructure crisis.9

This marked reticence of states to borrow could point to a fundamentally more fragile economic picture than the stock market, the Federal Reserve’s comments, or recent headlines seem to indicate. In spite of strong incentives to borrow and finance badly-needed infrastructure projects, states are—broadly speaking—taking a very conservative approach. They do not appear ready or willing to take on more debt, nor do they wish to boost taxes—none of which bodes particularly well for the future of American infrastructure.

Post Disclosure  

1 NPR. “10 Years After Bridge Collapse, America Is Still Crumbling.” Aug. 1, 2017

2 California Department of Water Resources

3 NPR. “10 Years After Bridge Collapse, America Is Still Crumbling.” Aug. 1, 2017

4 2017 Infrastructure Report Card

5 Ibid.

6 Ibid.

7 The Washington Post. “Trump’s big infrastructure plan has a lot of detail on everything but how to pay for it.” Feb. 11, 2018

8 Denter on Budget and Policy Priorities

9 Moody’s. “Moody's: Slow Growth in US State Debt Continues for Fifth Straight Year.” Apr. 24, 2018.

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Gold’s Old Ceiling or a New Floor? https://www.vaneck.com/blogs/gold-and-precious-metals/old-ceiling-or-new-floor/ Signs of a late-cycle economy and geopolitical risks continue to mount as gold maintains its resiliency and waits for a market catalyst.

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VanEck Blog 6/8/2018 12:00:00 AM

Gold Declines as U.S. Dollar Strengthened in May

Gold remained resilient in May, as the U.S. dollar strengthened considerably. The U.S. Dollar Index (DXY)1 gained 2.4% and closed the month at its highs for the year, driven by new fears of an Italian debt default and EU breakup. Populist parties from the left and right are attempting to form a coalition government that would likely drive Italy further into debt and to promote initiatives that would enable Italy to exit the euro. Italian President Sergio Mattarella blocked the coalition, which effectively suspended their plans. We expect to see the coalition make further attempts to gain power, which should keep the markets on edge for the foreseeable future.

As the DXY gained, the gold price fell to its low for the year of $1,282 per ounce on May 21. Gold subsequently advanced into month-end as the Italian situation rose to a boil, ending at $1,298.52 per ounce for a monthly decline of $16.83 (1.3%).

Gold Responds to Systemic Risks, Not Headlines

It seems that every time new, scary headlines emerge, press articles declare that gold no longer serves as a safe haven.2 The Italian political crisis is the latest case in point. The evolving situation in Italy is supportive of gold, as shown by its resilience against a strong move in the U.S. dollar. However, anyone expecting a big move from gold fails to understand the fundamentals of the gold market. Gold responds to genuine global systemic risks. These are risks that can have a negative financial impact on just about everyone personally and/or professionally, i.e., risks that bring excessive inflation or deflation, currency, debt, banking crises, or geopolitical events that impact trade and commerce. Localized risks that are the subject of most headlines do not elicit a strong response from gold.

Stock, bond, and currency markets reacted violently to the Italian news. However, the gold market remained calm, which tells us that, so far, this is not the systemic event that the headlines are implying. The chances of an EU breakup are still very small. The euro has survived Greece and Brexit. Gold price action indicates the EU will survive Italy as well. If the situation reaches global systemic proportions, we are sure there will be a strong response from the gold market. Until then, investors should be wary of the implications of the seemingly endless stream of scary headlines.

Gold can also have a different response locally that many American reporters ignore. In euro terms, gold gained €25.62 (2.4%) in May, making a new yearly high. Italians holding gold have a safe haven hedge.

Like gold, gold stocks saw little net movement in May, as the NYSE Arca Gold Miners Index (GDMNTR)3 advanced 0.2% and the MVIS Global Junior Gold Miners Index (MVGDXJTR)4 gained 0.3%.

Indications of Late-Cycle Economy Remain

Many indicators continue to tell us the economy is very late in the cycle. The current economic expansion is now the second longest on record, surpassed only by the tech boom of the 1990s. Convertible bond issuance by tech companies is on pace to challenge the levels last seen in 2000. The stock market is struggling to return to its highs, even though S&P 500 companies spent $158 billion buying back stock in the first quarter, a record pace according to a report from the S&P Dow Jones Indices. Delinquency rates for subprime auto loans have surpassed the levels of the global financial crisis. Financial regulation has come full cycle, as Congress passed a deregulation bill in May and the Fed advanced a proposal to ease the Volcker rule,5 both aimed at reducing crisis-era regulations. The Fed is tightening, but rates are still far below normal at this stage of the cycle. Accommodative monetary policies continue to promote asset price inflation. In May, the Rockefeller Collection auction surpassed all expectations, raising $832 million, nearly doubling the previous record for a collection, which was set in 2009.

Economic down-cycles are normally a healthy and somewhat painful way of cleansing the economy of bad debts, dead beat companies, and crooks. The extraordinary risk facing the financial system is that central banks have little to no room to stimulate when the current cycle comes to an end. There is no capacity for fiscal stimulus either and sovereign debt service could become very problematic. Fiscally, the developed world is looking more like Italy all the time.

The $1,365 Question

The second half of 2018 should be very interesting for the gold market. The chart shows the gold price has formed a wedge or pennant pattern that has been in place for several years. The positive aspect of this pattern is the trend of higher lows. Fundamentally, gold has been resilient, gaining strength from escalating geopolitical risks and uncertainties. The negative aspect is the ceiling that has formed around $1,365. There has not been a strong catalyst to take gold to a new higher trend line. Investors have been frustrated by this range bound price action, while speculators have been put off by the decreasing volatility. The apex of the wedge occurs in early 2019; therefore, we believe it is inevitable that gold will begin to establish a new trading pattern by year end. Similar patterns can be seen in the GDM and MVGDXJ indices and the price of silver.

Gold Price Chart, 2013 – 2018

Gold price chart, 2013 - 2018

Source: Bloomberg. Data as of May 31, 2018. Past performance is not indicative of future results.

Without a second half catalyst, gold will probably drift sideways, falling below the lower trend line and further eroding confidence in the metal. However, in the second half of the year, we could see catalysts that may boost gold to a higher range that draws new attention from investors. To start, the geopolitical risks that have been supportive of gold are likely to continue – tensions in the Middle East and North Korea, and uncertainty surrounding Trump administration policies. With the economy firing on all cylinders and lofty commodities prices, an inflation surprise is possible. Mid-term elections in the U.S. may result in destabilizing shifts in power if the Democrats prevail. Leadership changes in Italy are set to bring added risks to European banks, sovereigns, and the euro. Last but not least, signs that the post-crisis expansion is nearing its end may emerge.

Gold tested the low end of its trading range in May. As gold has shown price weakness ahead of Fed rate increases, we expect gold to continue to drift around the bottom of the range until the expected rate increase on June 12. Futures positioning and flows into gold bullion exchange traded products suggest gold is poised for another post-Fed meeting rally. If gold retests $1,365 in the second half, will it again act as a ceiling or become a new floor? We wish we could know the answer to such questions.

Download Commentary PDF with Fund specific information and performance

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Calling All Gold Bulls: A Barron's Q&A with Joe Foster https://www.vaneck.com/blogs/gold-and-precious-metals/barrons-q-and-a-joe-foster/ In a Barron’s Q&A, Joe Foster shares his insights on a possible breakout year for gold in 2018.

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VanEck Blog 6/8/2018 12:00:00 AM

Is gold poised for a breakout year in 2018? Portfolio Manager Joe Foster sat down with Barron’s for a Q&A to share his insights on the gold market as well as what he looks for in gold stocks, highlighting several companies currently in the portfolio.

Mr. Foster has been in the gold industry for over 40 years and brings a unique perspective to gold investing through his prior experience and technical expertise as a gold geologist.

Barron's Q&A with Joe Foster Read the Barron’s Q&A.

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It’s Now or Never for Energy Stocks https://www.vaneck.com/blogs/market-insights/its-now-or-never-energy-stocks/ We think commodities could well be the best performing asset class in 2018, with energy stocks presenting one of the most exciting opportunities.

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VanEck Blog 6/8/2018 12:00:00 AM

As the year progresses, commodities look as if they could become the best performing asset class in 2018 (see Q2 2018 Investment Outlook: Commodities Seizing Their Moment). We believe that major opportunities continue to exist – especially in energy stocks. 

Back in March, our view was that with global growth kicking in and fueling demand, commodities were well positioned for a strong year and significant opportunities were emerging. 

For several years now, one of our main themes has been that, beyond the macro trends, commodity companies have been undergoing a rationalization process. Since the end of 2015, supply has been constrained. Precious metals companies were the first to restructure and focus on shareholder returns and shareholder equity, followed by the base metals sector. We have, subsequently, seen good rallies in both.

We believe the time has now come for energy companies. For the last year, we have been examining how such a reform process, when applied to the U.S. energy market, has the potential to transform that industry too. Our fund managers note how energy companies, especially those in unconventional oil and gas exploration and production, are now transitioning from “investment” to “harvest” mode, with mature, cash-flow heavy business enabling dividends and share repurchases (see Natural Resource Companies Focus on Returns in 2018).

Energy Stocks: The Opportunity Is Now

Since the beginning of 2018, oil prices have continued to march towards $80 a barrel, but energy stocks have lagged behind.1 Our recent research in the space shows that the returns of unconventional oil & gas equities, or exploration and production (E&P) companies, can mostly be explained by the performance of three independent variables: oil, natural gas, and the U.S. stock market. Meanwhile, similar research has shown that oil service equity returns are predominately driven by oil prices and the U.S. stock market.

The performance variance between E&P companies and the three key independent variables has recently narrowed significantly from widths not seen for nearly a decade. However, oil servicers still appear to be trading at a discount when we compare actual performance of oil servicers with their predicted performance based on oil and U.S. stock market returns. These levels are close to some of the lowest historical values since 2001, and we believe that this trade in energy stocks constitutes one of the most exciting currently available.

Performance Variance of Oil Servicers and Key Independent Variables

Chart Performance Variance of Oil Servicers and Key Independent Variables

Source: VanEck; FactSet; Bloomberg. Data as of May 31, 2018. “Oil Servicers”, ”Oil”, and “U.S. Stock Market” represented by MVIS US Listed Oil Services 25 Index, West Texas Intermediary (WTI) oil price, and S&P 500 Index, respectively. See index definitions below. Past performance is not indicative of future results. This information is being provided for informational purposes only. It is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. No market data or other information is warranted or guaranteed by VanEck.

Download the full research outlook to learn more.

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BDCs Responding Favorably to Recent Fiscal Policy https://www.vaneck.com/blogs/etfs/bdc-responding-to-fiscal-policy/ Recent legislation has served as a tailwind so far for business development companies, making this equity income asset class an attractive complement to traditional income allocations.

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VanEck Blog 6/7/2018 12:00:00 AM

Recent legislation has been serving as a tailwind for business development companies (BDCs). The passage of this year’s omnibus spending bill, which included the Small Business Credit Availability Act (SBCAA),1 as well as last year’s tax reform were expected to positively impact BDCs. In fact, since the spending bill’s March 22 announcement, the MVIS US Business Development Companies Index was up 6.9%, outperforming the main U.S. equity and other high yield indices.2

Analysts covering the space have generally expected the tax plan to be a modest net positive for BDCs, in part due to the lower tax rate combined with its limits on the deductibility of interest expense.

Meanwhile, one of the main implications for BDCs from the SBCAA is the leverage limit increase from 1:1 to 2:1.The new limit is modest compared to the much higher leverage, on average, of banks or mortgage REITs. For example, this increased leverage flexibility would allow BDCs to invest conservatively with relatively stronger risk-adjusted return potential, subject to shareholder or board approval. This could reduce the need for lower grade investments to help enhance yield potential. However, how much of, and to what extent, the BDC universe will employ this new flexibility remains to be seen.

The Current Case for BDCs

BDCs currently average about 9.3%3 in dividend yield and over 80% in loan portfolios with floating rate loans, which may allow BDCs to benefit from a rising interest rate environment.4 As such, BDCs may serve as a complement to income allocations to help enhance yield without adding significant interest rate risk. In addition, BDCs have historically offered a competitive risk/return tradeoff when compared with high yield bonds, leveraged loans, and equities across the market capitalization spectrum.

Annualized Standard Deviation versus Annualized Return (%)
8/4/2011 – 5/31/2018

Chart showing annualized standard deviation (risk) versus annualized return

Source: FactSet, Bloomberg. Data as of May 31, 2018. 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 disclosures below.

Allocating to BDCs can help investors gain exposure to the growth and income potential of privately held companies, which has traditionally been limited to institutional or high net worth investors. BDCs lend to and invest in small- to mid-sized private companies, which tend to be either rated below investment grade or not rated at all. Therefore, investors should have a risk tolerance for securities rated below investment grade (i.e., high yield/BB+ or below). Furthermore, publicly listed BDCs are equities and may be sensitive to investor sentiment and subject to greater volatility than high yield bonds or leveraged loan portfolios.

Along with historically attractive income and growth potential, given their access to the private middle market space and high relative yields, BDCs also have a high level of floating rate loan exposure. Combined with the recent tax reform and passage of the SBCAA, we believe the current case for BDCs is compelling. High yield and equity income investors may want to consider a diversified allocation of BDCs to complement their traditional income portfolios.

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

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Healthcare Recovery Side Effect: U.S. Moats Rebound https://www.vaneck.com/blogs/moat-investing/side-effect-healthcare-recovery/ A bounce-back in the healthcare sector led the rebound in U.S. moats in April, while international moats lagged the broad market as two industrials leaders struggled.

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VanEck Blog 5/30/2018 12:00:00 AM

For the Month Ending April 30, 2018

Performance Overview

U.S. moat companies rebounded in April, with the U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") leading the broad U.S. market as represented by the S&P 500® Index (1.47% vs. 0.38%, respectively). International moats failed to outperform the broad international markets for the first month since January 2018. Represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), international moats trailed the MSCI All Country World Index ex-USA in April (1.15% vs. 1.60%, respectively).

International Moats: Industrials Leaders Face Setbacks

Two industrials firms led detractors in the International Moat Index for the month. Japan’s Fanuc Corp. (6954 JP, -15.07%) posted strong fiscal 2017 results in April, but weak 2018 guidance sparked a sell-off. The automation and robotics firm expects demand from the IT and smartphone industries to impact its revenue and profitability in the short term. Morningstar analysts have reduced the company’s fair value estimate but maintain its wide moat rating. German forklift manufacturer Kion Group AG (KGX GR, -10.11%) also struggled, impacted by U.S. dollar exposure in first quarter results as well as a decline in year-over-year orders. However, Morningstar analysts note that forklift demand in North America remains robust. United Kingdom, Singapore, and the Netherlands were the top three contributing countries, with standout companies including Philips (PHIA NA, +10.99%) and Genting Singapore PLC (GENS SP, +9.12%) helping to offset some of the negative performance.

U.S. Domestic Moats: Healthcare’s Health Recovers

The healthcare sector became a boon for the U.S. Moat Index in April following a period of negative influence on the index. The sector overweight was the biggest contributor to index performance for the month, led by CVS Health Corp. (CVS US, +13.11%). CVS reported a strong first quarter shortly after the end of the month, which had followed steep declines in the company’s stock price earlier in the year. The company reported increases in revenue across all segments as investors are now looking forward to the expected closing of its acquisition of Aetna, according to Morningstar analysts. McKesson Corp. (MCK US, +10.89%) and Express Scripts Holding Co. (ESRX US, +9.58%) were two other healthcare standouts. Materials companies also contributed positively to U.S. Moat Index returns while consumer staples were the main sore spot. PepsiCo Inc. (PEP US, -7.52%), Procter & Gamble Co. (PG US, -7.88%), and The Hershey Co. (HSY US, -7.09%) all struggled.

 

(%) Month Ending 4/30/18

Domestic Equity Markets

International Equity Markets

(%) As of 4/30/18

Domestic Equity Markets

International Equity Markets

(%) Month Ending 4/30/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Total Return
CVS Health Corp 13.11
Compass Minerals International Inc 11.61
McKesson Corp 10.89
Express Scripts Holding Co 9.58
VF Corp 9.11

Bottom 5 Index Performers
Constituent Total Return
Bristol-Myers Squibb Company -17.05
Allergan PLC -8.70
L Brands Inc -8.64
Microchip Technology Inc -8.43
Procter & Gamble Co -7.88

View MOAT's current constituents
View MWMZX's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Total Return
Royal Philips NV 10.99
Genting Singapore PLC 9.12
Grupo Aeroportuario del Centro Norte SAB de CV 8.58
Orange SA 7.72
Meggitt PLC 7.42

Bottom 5 Index Performers
Constituent Total Return
Fanuc Corp -15.07
KION GROUP AG -10.11
Svenska Handelsbanken A -9.91
SINA Corp -8.37
Mobile TeleSystems PJSC -8.00

View MOTI's current constituents

As of 3/16/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
McDonald's Corp MCD US
Procter & Gamble PG US
General Mills Inc GIS US
Dominion Energy Inc D US
Campbell Soup Co CPB US
Hershey Foods Corp HSY US
Cheniere Energy Inc LNG US
Microchip Technology Inc MCHP US
Comcast Corp A CMCSA US
Franklin Resources Inc BEN US
PepsiCo Inc PEP US

Index Deletions
Deleted Constituent Ticker
Visa Inc A V US
VF Corp VFC US
Polaris Inds Inc PII US
The Bank of New York Mellon Corp BK US
Veeva Systems Inc A VEEV US
United Technologies Corp UTX US
TransDigm Group TDG US
CBRE Group Inc. CBG US
Bristol-Myers Squibb BMY US
Emerson Electric Co EMR US
Patterson Cos Inc PDCO 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
Beijing Enterprises Holdings Ltd. China
LINE Corp Japan
GEA AG Germany
Unilever United Kingdom
Vodafone Group United Kingdom
Grupo Aeroportuario del Pacifico, Mexico
Sun Hung Kai Properties Ltd. Hong Kong
KION Group AG Germany
SK Telecom Co Ltd South Korea
Genting Singapore Plc Singapore
Koninklijke KPN NV Netherlands
Beijing Capital International Airport Co. Ltd. China
Brambles Industries Ltd Australia
Banco Bilbao Vizcaya Argentaria SA Spain
Rolls-Royce Holdings Plc United Kingdom
CapitaLand Mall Trust REIT Singapore
Uni Charm Corp Japan
Capitaland Ltd Singapore
Symrise AG Germany
Svenska Handelsbanken A Sweden
LafargeHolcim Ltd Switzerland
Hong Kong Land Hldgs Ltd China
Smiths Group United Kingdom
Grifols SA Spain
Seven & I Holdings Co Ltd Japan
Kubota Corp Japan

Index Deletions
Deleted Constituent Country
Cameco Corp Canada
Canadian Pacific Railway Ltd Canada
Enbridge Inc Canada
Cemex SA CPO Mexico
America Movil SAB de CV L Mexico
Embraer S.A. Brazil
Airbus SE France
Sanofi-Aventis France
Luxottica Group SpA Italy
Crown Resorts Ltd Australia
Sonic Healthcare Ltd Australia
Westpac Banking Corp Australia
AMP Ltd Australia
Commonwealth Bank Australia Australia
QBE Insurance Group Ltd Australia
Magellan Financial Group Limited Australia
Inditex SA Spain
Telefonica SA Spain
MGM China Holdings Ltd Hong Kong
Roche Hldgs AG Ptg Genus Switzerland
Elekta B Sweden
Sina Corp (Caymans) China
ENN Energy Holdings Ltd China
DBS Group Holdings Singapore
Overseas-Chinese Banking Singapore
KBC Group NV Belgium

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



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Real Assets Fueled by Energy https://www.vaneck.com/blogs/allocation/real-assets-fueled-by-energy/ After launching into a period of strong real assets performance, the VanEck Vectors Real Asset Allocation ETF (RAAX) remains fully invested across commodities, natural resource equities, and MLPs in May.

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VanEck Blog 5/28/2018 12:00:00 AM

The VanEck Vectors Real Asset Allocation ETF (RAAX) uses a data-driven, rules-based process that leverages over 50 indicators (technical, macroeconomic and fundamental, commodity price, and sentiment) to allocate across 12 individual real asset segments in five broad real asset sectors. These objective indicators identify the segments with positive expected returns. Then, using correlation and volatility, an optimization process determines the weight to these segments with the goal of creating a portfolio with maximum diversification while reducing risk. The expanded PDF version of this commentary can be downloaded here.

April Performance Summary

The VanEck Vectors Real Asset Allocation ETF (RAAX) launched, on April 9, into a period of strong performance for real assets. RAAX performed well on both an absolute and relative basis. Through April, in the first 16 days of its life, RAAX returned +2.98% based on net asset value versus +2.41% for its benchmark, the Blended Real Asset Index, which is comprised of an equally weighted blend of the returns of Bloomberg Commodity Index, S&P Real Assets Equity Index, and VanEck Natural Resources Index*. Equal weightings are reset monthly.

Total Returns (%) as of April 30, 2018
  1 Mo YTD 1 Year Life
(04/09/18)
RAAX (NAV) - - - 2.98
RAAX (Share Price) - - - 3.26
Blended Real Asset Index* - - - 2.41

Total Returns (%) as of March 31, 2018
  1 Mo YTD 1 Year Life
(04/09/18)
RAAX (NAV) - - - -
RAAX (Share Price) - - - -
Blended Real Asset Index* - - - -

The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the ETF incurred all expenses and fees, investment returns would have been reduced. Investment returns and ETF share values will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. ETF returns assume that distributions have been reinvested in the Fund at NAV.

Returns less than a year are not annualized.

Expenses: Gross 0.81%; Net 0.74%. Expenses are capped contractually at 0.55% through February 1, 2020. Expenses are based on estimated amounts for the current fiscal year. Cap exclude certain expenses, such as interest, acquired fund fees and expenses, and trading expenses.

RAAX's positioning was moderately defensive in April, and it was fully invested across commodities, natural resource equities, and Master Limited Partnerships ("MLPs"). The largest real asset investments were in diversified commodities (30%), gold bullion (20%), and agribusiness equities (20%).

May Positioning: Fully Invested and Mostly Bullish

RAAX remains fully invested across commodities, natural resource equities, and MLPs. As they were at launch, the largest weightings remain in diversified commodities (30%), gold bullion (20%), and agribusiness equities (20%). However, its allocation to gold equities now stands at 10%, increasing overall gold exposure to 30%.

We are bullish on most real assets. Based on the model's analysis, diversified commodities, gold, agribusiness equities, MLPs, steel equities, oil services equities, and unconventional oil and gas equities are all well positioned to perform. We are bearish on Real Estate Investment Trusts (REITs), infrastructure, base metal equities, and coal equities.

Asset Class Weights

Charts indicating real asset sector and asset class weights for May 2018

Source: VanEck. Data as of May 2, 2018.

This month we increased our exposure to gold equities and removed our exposure to coal equities. Another notable point is that we are bearish on two interest rate sensitive sectors, REITs and infrastructure, as interest rates continue to rise.

Remember, RAAX only invests in asset classes that the model is bullish on, and the weightings themselves are not an indication of conviction but a byproduct of a quantitative process that seeks to maximize diversification and minimize volatility. Let's take a look at some of the reasons why RAAX maintains a bullish or bearish position on certain asset classes.

Gold

The model remains bullish, and overall exposure increased based on the portfolio diversification benefits that gold provides. Gold prices have been flat this year, but the precious metal has provided stability during periods of broad market stress.

Cumulative Growth of $10,000 of Gold and S&P 500 Index in 2018

Line chart showing cumulative growth of $10,000 of gold and S&P 500 Index in 2018

Source: FactSet; Bloomberg. Data as of May 2, 2018. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

Oil Services Equities

Research conducted here at VanEck has identified that oil price and the S&P 500 Index can be used to explain most of the performance of oil services stocks historically. Using these variables to generate an expected return for oil services stocks, we can look at the difference between this and the actual return of oil services stocks. Right now, based on these variables, oil services stocks are trading at a substantial discount, and the chart below shows that oil services stocks haven't been this cheap since 2001.

Performance Variance of Oil Servicers and Key Independent Variables

Graph of the performance variance of oil servicers and key independent variables, highlighting the current -2.60 standard deviation below their historical mean relationship, which is the biggest difference since 2001

Source: VanEck; FactSet; Bloomberg. Data as of April 2018. Past performance is no guarantee of future results. Oil servicers measured by the MVIS U.S. Listed Oil Services 25 Index. Investors cannot invest directly in an index.

The model remains bullish on oil services stocks. Key bullish indicators include strong oil prices, reasonable volatility in oil services equities, and strong demand for natural gas. The chart below shows that oil prices are up 14.83% this year through April.

Cumulative Growth of $10,000 of Crude Oil in 2018

Line chart showing cumulative growth of $10,000 of crude oil in 2018

Source: FactSet. Data as of April 30, 2018. Past performance is no guarantee of future results. Oil measured by West Texas Intermediary (WTI) oil price. Investors cannot invest directly in an index.

Coal Equities

At launch, RAAX had a small weighting to coal, but in May, this exposure was completely eliminated based on falling coal equity prices and weakening supply and demand data. Below is our economic composite for coal. It turned bearish at the end of April due to declining demand for coal in the U.S. and China, and declining production in the U.S.

Coal Economic Indicator Composite

Chart showing the coal economic indicator composite

Source: VanEck. Data as of April 30, 2018. Past performance is no guarantee of future results. Coal equities measured by MVIS Global Coal Index. Investors cannot invest directly in an index.

A Closer Look at the What, When, and How

Step One: What to Own

The aphorism "a rising tide lifts all boats" is appropriate here. April was a great month to invest in real assets. Each real asset in our investment universe and the approximated holding period return of the underlying index is listed below. The assets that we were bearish on are shaded.

Holding Period Return
April 10 – April 30, 2018

Gold Equities 1.42% Oil Services Equities 13.97%
Agribusiness Equities 1.22% Unconventional Oil & Gas Equities 12.36%
Coal Equities -1.78% Global Metals & Mining Equities 4.65%
Gold Bullion -1.56% Diversified Commodities 3.60%
MLPs 6.08% REITs 1.53%
Global Infrastructure 1.53% Steel Equities 7.42%

Source: Bloomberg; FactSet. Data as of April 30, 2018. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

Step Two: When to be Invested

We were fully invested in April. This was the right call as real asset investments rallied. RAAX begins to raise a cash position when five or more assets become bearish. This is typically indicative of a systemic market event. RAAX has not raised cash since it launched.

Step Three: How to Allocate

Capital is allocated amongst assets on which the model is bullish on using an optimization process designed to maximize our diversification and minimize our volatility. In April, this resulted in a 50% exposure to commodities, a 45% exposure to natural resource equities, and a 5% exposure to MLPs. RAAX's allocation in May has not changed drastically.

Monthly Asset Class Changes

Asset Class May-18 Apr-18 Change
Gold Equities 10% 5% 5%
Diversified Commodities 30% 30% 0%
Agribusiness Equities 20% 20% 0%
Gold Bullion 20% 20% 0%
Limited Partnerships 5% 5% 0%
Service Equities 5% 5% 0%
Cash 0% 0% 0%
Unconventional Oil & Gas Equities 5% 5% 0%
Steel Equities 5% 5% 0%
Estate Investment 0% 0% 0%
Global Infrastructure 0% 0% 0%
Metals and Mining Equities 0% 0% 0%
Coal Equities 0% 5% -5%

Source: VanEck. Data as of May 2, 2018.

Additional Resources

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Looking Beyond Recent EM Debt Volatility https://www.vaneck.com/blogs/emerging-markets-bonds/beyond-recent-em-debt-volatility/ ]]> VanEck Blog 5/24/2018 12:00:00 AM

We try not to say “It’s different this time” with regard to emerging markets (EM) debt. Fortunately, at least in terms of helping to honor this vow, various emerging markets countries send out periodic reminders that all is not going smoothly in every corner of the globe. As emerging markets local debt lost more than 8% since the beginning of April and moved into negative territory for the year1, there were some powerful reminders of the sources of volatility that can appear among the geographically, economically, and politically diverse landscape of emerging markets. As always, we saw volatility stemming from both internal and external factors.

However, we do not believe the emerging markets trade is at an end. Here are four reasons why:

  • First, appropriately, additional risk has been priced into struggling markets, such as Turkey (our definition of an emerging market is one whose currency weakens and rates rise in periods of market stress or when the market believes the country has misstepped—e.g. a policy mistake or undesirable political dynamics).
  • Second, additional risk has also been priced into most of the better economic and political performers. Ironically, one of the worst performing markets, Argentina, has been pursuing fiscal reforms and has a central bank that has reacted prudently and independently to negative flows. The J.P. Morgan GBI-EM Global Core Index now yields over 6.8% on a nominal basis, and a very comfortable 3.5% on a real basis after adjusting for average inflation.
  • Third, emerging markets does not seem to be overheating from a valuation perspective (see chart), or from an issuance perspective.

    EMFX Returns
    January 2013 – May 2018

    Line chart of EMFX Returns from January 2013 to May 2018

    Source: J.P. Morgan. Data as of 5/21/2018. Represents the return of the J.P. Morgan GBI-EM Global Diversified Index attributable to foreign currency. Index returns are not representative of fund returns. See below for index description. Past performance is no guarantee of future results.

  • Fourth, emerging markets economies remain both a driver of, and beneficiary of, a benign global growth environment. Many, but not all, continue to benefit directly from higher commodity prices – a trend that has remained in place as emerging markets sold off.


Additional risks do remain in the market. The recent underperformers, especially Turkey and Argentina, have not yet managed to stabilize flows and their currencies. Although we believe it is unlikely, the risk of contagion from the current selloff in these countries to other emerging markets must be monitored. The current level of political risk is also raised with upcoming elections in two major markets: Mexico (July 1st) and Brazil (October 7th). In addition, although rate increases by the U.S. Federal Reserve continue to be gradual and well telegraphed, any signals that elevate the probability of three or more additional hikes over the remainder of the year will likely result in more pain for emerging markets currencies.

We believe that it is not different this time, when we look beyond the current volatility. Certainly some bad (or, more appropriately, bruised) apples have been punished by the markets. This has been the case with EM historically, and some good apples have been tossed out with the bad.

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Floating Rate Notes for Rising Rates https://www.vaneck.com/blogs/etfs/floating-rates-for-rising-rates/ Floating rate notes offer investment grade credit quality, with near-zero interest rate duration, making them attractive complements to cash holdings or effective tools to de-risk a portfolio overall.

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VanEck Blog 5/23/2018 12:00:00 AM

The 10-year U.S. Treasury rate is reaching fresh highs, and the Federal Reserve has a more hawkish outlook than in recent years. In this environment, floating rate notes (FRNs) may be an effective investment grade alternative to other fixed income instruments. They offer a conservative, investment grade income allocation that can complement cash holdings with meaningful yield pickup, as well as a near-zero interest rate duration option within a fixed income portfolio.

Securities linked to Libor1 or interbank rates have benefited investors more recently as interest rates have climbed. Floating rate notes are securities that employ coupon reset mechanisms, which help limit interest rate duration by fluctuating in line with base interest rates. These securities have also helped increase income, particularly as Libor has risen over 100 basis points since last year, mainly influenced by U.S. monetary policy.

Investment Grade Floating Rate Notes

Floating rate notes offer a conservative, investment grade income allocation that can be a complement to cash holdings with meaningful yield pickup, as well as a near-zero interest rate duration option within a fixed income portfolio.

Furthermore, greater yield potential can be generated by selecting corporate floating rate notes. In addition, allocating to longer-maturity floating rate notes has, historically, increased yield potential with only incrementally higher average return volatility.

It is important to note that a weightings bias toward longer-maturity floating rate notes, as seen with the MVIS Investment Grade Floating Rate Note Index, has had a negligible impact on interest rate risk given the notes’ coupon reset mechanisms. The table below compares recent returns, yields, and durations of comparable investment grade indices, illustrating the attractive risk/return trade off of floating rate notes.

Limit duration risk and enhance short-term yield potential

  Total Return 5-Year
Standard
Deviation
April 30, 2018 Yield Duration YTD 1-Year 3-Year 5-Year
MVIS FRN Index
(100% Corporate FRNs and Longer Maturity Bias)  
2.87% 0.13 0.90 2.86 2.24 1.77 0.60
Bloomberg Barclays FRN (< 5 Y) Index  2.67% 0.11 0.81 2.20 1.56 1.25 0.33
Bloomberg Barclays 1 – 3 Month Treasury Index  1.82% 0.20 0.47 1.12 0.52 0.32 0.13
Bloomberg Barclays US Aggregate Bond Index  3.29% 6.05 -2.19 -0.32 1.07 1.47 2.91

Source: FactSet, Bloomberg. Data as of 4/30/2018 unless otherwise noted. Past performance is no guarantee of future results. All indices are unmanaged and are not securities in which investments can be made. Index returns are not representative of Fund returns. See Index Descriptions below.

Floating rate notes offer investment grade credit quality (i.e., BBB-rated and above), but with far less interest rate duration than traditional fixed income investments. Targeting corporate floating rate notes and longer average maturity notes may offer greater yield potential. Investors may use such an allocation to either enhance their cash positions or to meaningfully de-risk their portfolios from equity or below-investment grade credit exposures when market volatility becomes less favorable.

Investors can gain exposure to FRNs through VanEck Vectors® Investment Grade Floating Rate Note ETF (FLTR®).

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Late Cycle Yes, But Opportunities May Still Exist https://www.vaneck.com/blogs/allocation/late-cycle-opportunities-may-still-exist/ This month’s asset class positioning for the VanEck NDR Managed Allocation Fund (NDRMX) sees an increase in stock allocation to 83% and a decrease in bond allocation to 17%.

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VanEck Blog 5/22/2018 12:00:00 AM

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

April Performance Summary

The VanEck NDR Managed Allocation Fund (the “Fund”) returned -0.31% versus 0.31% for its blended benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) in April.

As compared to the blended benchmark, the Fund had a slight stock overweight in April. Its small stock overweight helped performance. We held a 66% allocation to stocks, a 34% allocation to bonds, and a near 0% allocation to cash. Global stocks returned +0.95% and bonds returned -0.74%. In aggregate, the Fund’s regional equity positioning detracted from performance. We were overweight both the U.S. and emerging markets. This hurt performance as U.S. and emerging markets stocks underperformed. We were overweight large-cap growth stocks and underweight small-cap value stocks. Large-cap growth stocks returned +0.35% and small-cap value stocks returned +1.73%.

Total Returns (%) as of April 30, 2018
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
-0.31 -1.81 6.97 9.24
Class A: Maximum 5.75% load -6.04 -7.46 0.84 6.02
60% MSCI ACWI/
40% BbgBarc US Agg.
0.31 -0.71 8.59 9.53
Morningstar Tactical Allocation
Category (average)1
0.04 -1.59 6.21 7.66

Total Returns (%) as of March 31, 2018
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
-0.99 -1.50 8.69 9.85
Class A: Maximum 5.75% load -6.69 -7.17 2.45 6.46
60% MSCI ACWI/
40% BbgBarc US Agg.
-0.99 -1.02 9.63 9.78
Morningstar Tactical Allocation
Category (average)1
-0.89 -1.62 7.09 7.99

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

Returns less than a year are not annualized.

Expenses: Class A: Gross 2.33%; Net 1.39%. Expenses are capped contractually until 05/01/19 at 1.15% for Class A. Caps exclude certain expenses, such as interest.

May 2018 Positioning: Increased Stock Allocation

The Fund recently increased its stock allocation from 66% to 83%, reduced its bond allocation from 34% to 17%, and maintained a near 0% cash allocation. The increased stock allocation resulted in larger allocations to each equity region, namely increasing allocations to the U.S., Europe ex. U.K., and the U.K. Within the U.S., we increased our allocation to large-cap value and small-cap value, and reduced our allocations to large-cap growth and small-cap growth.

Asset Class Positioning vs. Neutral Allocation, May 2018

Chart showing asset class positioning vs. neutral allocation for April 2018

Source: VanEck. Data as of May 2018.

Weight-of-the-Evidence

It is generally accepted that we are in the late stages of the bull market, but that does not mean that stocks will stop rising. The indicators in the model are currently signaling a buying opportunity now that the recent episode of high market volatility appears to be subsiding. May’s equity shift in the model from 66% to 83% was largely driven by strong technical and sentiment indicators.

Global breadth turned bullish in the last month in the model. This indicator measures the percentage of country stock markets that are trending higher. Typically, more countries with rising stock markets are a good thing. As you can see from the chart below, 63.8% of countries are currently trading above their intermediate-term moving average.

% of MSCI ACWI Markets Above 50-Day Moving Average

Line chart showing NDR’s U.S. Sentiment Indicator

Source: Ned Davis Research. Data as of April 30, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

U.S. investor sentiment changed from bearish to bullish. Sentiment is a contrarian indicator. Investors turned pessimistic about the outlook for stocks after the recent stock market volatility. We are now seeing signs that this is changing. This indicator measured a state of extreme pessimism in late March. Sentiment, as measured by NDR’s indicators, is now reversing, which triggered a bullish signal.

Standard Deviations from Rolling 5-Week Mean

Line chart showing NDR’s U.S. Sentiment Indicator

Source: Ned Davis Research. Data as of April 30, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Ed Clissold, Chief U.S. Strategist at NDR, recently published a piece titled “Navigating a Mature Bull Market”, in which he suggests that the concerns over the flattening yield curve may be overblown. The potential of an inverted yield curve has been the topic du jour for some time now. The yield curve has been flattening as the Fed raises interest rates while the demand for longer dated bonds remains strong. Inverted yield curves are a concern, because they may reflect that the market expects an upcoming recession. Below is Ed Clissold’s chart, which shows the spread between the 10-year and 2-year Treasury yields. The shaded areas are recessions classified by the National Bureau of Economic Research.

Yield Curve – 10-year Minus 2-year Treasury Yield

Line chart showing NDR’s U.S. Sentiment Indicator

Source: Ned Davis Research. Data as of April 30, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

While the curve is not yet inverted, it has flattened and is trending towards inversion. However, as we’ve seen before, the curve can stay flat for many years before it inverts, or it may not invert at all. This is interesting and worth keeping an eye on. However, at this point our evidence points to higher stock prices.

NDR Indicator Summary, May 2018

A summarized view of NDR’s indicators

Source: Ned Davis Research. Data as of April 30, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Additional Resources

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Structural Reforms Taking Hold in Egypt https://www.vaneck.com/blogs/etfs/structural-reforms-in-egypt/ Structural reforms, coupled with a loan package from the IMF, have led to a positive outlook for long-term economic prospects in Egypt.

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VanEck Blog 5/14/2018 12:00:00 AM

Authored by John Patrick Lee, CFA, Associate Product Manager

As emerging markets in general enjoy a renaissance of investor appetite amid global growth and relative valuations, Egypt has been undergoing an economic transformation that is breathing life into an economy that had been stymied by the after-effects of revolution. Egyptian equities have been a performance standout over the last year, returning nearly 53% compared to approximately 22% for the broad emerging markets index.1

The Egyptian revolution of 2011 led to a far-ranging upheaval of the economic and social fabric of Egypt. The immediate economic after-effects of the revolution included a decline in foreign direct investments, a high budget deficit, high unemployment, high poverty, and a low standard of living. As Egypt transitioned away from its prior government, the economy entered a prolonged crisis period, requiring external financing from outside countries. Ultimately, Egypt turned to the International Monetary Fund (IMF) for help.

IMF Loan and Reforms

In November 2016, the IMF approved a multi-step loan package for Egypt worth $12 billion, contingent upon Egypt’s ability to enact structural economic reforms. According to the IMF, the reforms are meant to restore macroeconomic stability and promote inclusive growth.

The IMF categorized the reforms under four key pillars:2

  • Significant policy adjustment including (1) liberalization of foreign exchange system; (2) monetary policy aimed to contain inflation; and (3) strong fiscal consolidation to ensure public debt sustainability
  • Strengthening social safety nets by increasing spending on food subsidies and cash transfers
  • Far reaching structural reforms to promote higher and inclusive growth, increasing employment opportunities for youth and women
  • Fresh external financing to close financing gaps

Market Effects of the Reforms

One of the key reforms instituted was to float the Egyptian pound, which was pegged to the US dollar prior to November 2016. Immediately after floating the pound, Egyptian assets lost roughly 50% of their value and inflation spiked, especially for imported goods. Inflation reached an annualized high of 35% by July 2017 before beginning to subside. A temporary rise in inflation was an expected outcome of letting the market freely value the currency, which to that point had been propped up by burning through foreign reserves. Between November 2016 and August 2017, the Central Bank of Egypt (CBE) aggressively hiked interest rates to combat inflation, raising overnight rates 700 basis points.

After the initial devaluation, interest rate hikes, and reform implementation, Egyptian assets stabilized, and foreign investments have flowed into the country. In December 2017, foreign holdings of Egyptian Treasury bills hit all-time record highs and have continued to move higher, which has generally been viewed as a positive sign for the rebounding economy.

Equity assets have also been moving higher since the summer of 2017, after the enactment of a new investment law aimed at attracting foreign investment and making doing business in Egypt relatively easier. As inflation eased, the CBE was able to cut interest rates in February and March of 2018 with two consecutive 100 basis point cuts. This has given Egyptian equities another boost.

Are the Reforms Sustainable?

In January of 2018, the IMF announced completion of its second review of the reforms. The IMF noted that the reforms have so far led to stabilization of GDP growth, moderating inflation, and fiscal consolidation.3 The completion of the second review led to another round of loan disbursements, with roughly half of the planned $12 billion having been delivered to Egypt. The markets have continued to react positively to the developments, with equity assets and foreign holdings of Treasuries rising throughout 2018 so far.

In April of 2018, President Abdel Fattah el-Sisi was re-elected by a wide margin, albeit on low voter turnout and allegations of heavy handed tactics to silence opponents. Sisi nonetheless is in a position to continue reform efforts and seems to have gained investor confidence as reflected in a positive IMF review and the ongoing rally in Egyptian assets.

Investors seeking exposure to Egypt will find that Egyptian equities are not well represented in broad based emerging markets indexes. We believe that VanEck Vectors® Egypt Index ETF (EGPT®) may be an attractive way to target this turnaround story.

MVIS Egypt Index versus MSCI Emerging Markets Index
December 2016 – April 2018

Chart showing cumulative growth of MVIS Egypt Index vs. MSCI Emerging Markets Index

Source: FactSet

Click here for current EGPT holdings.

This commentary is not intended as a recommendation to buy or to sell any of the named securities. Holdings will vary for the EGPT ETF and its corresponding Index.

Index performance is not representative of fund performance. Past performance is no guarantee of future results. To view fund performance current to the most recent month end, call 800.826.2333 or visit vaneck.com.

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EOS, TRX, ADA, and BCH Rock in April https://www.vaneck.com/blogs/digital-assets/eos-trx-ada-and-bch-rock-in-april/ Digital Assets roared back into the public spotlight in April as positive news in the market outweighed negative news for the first time this year.

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VanEck Blog 5/14/2018 12:00:00 AM

Authored by Gabor Gurbacs, Director of Digital Asset Strategy, and Kyle DaCruz, Product Manager

During April 2018, Digital Assets1 roared back into the public spotlight as bulls were finally rewarded. The MVIS® CryptoCompare Digital Assets 10 Index (MVDA10) posted its first positive monthly performance of 2018 (+62%) reversing much of its losses over the previous three months. All digital assets comprising the MVDA10 rebounded from their March declines, led by EOS (EOS), which rallied during the month from $6.03 to $17.96 and posted a gain of +198%. Tronix (TRX) also posted a large gain, increasing from $0.03 to $0.10 (+183%) and closing at its highest price since January. Cardano (ADA) jumped from $0.16 to $0.35, recording a gain of +122% and Bitcoin Cash (BCH) moved up from $709.36 to $1,385.32, gaining +95%. Rounding out the top five best performers was Neo (NEO) with a return of +67%, moving up from $51.36 to $85.82.

For the first time this year, in April, positive market news outweighed negative news, though persistent regulatory fears lingered. From a general market perspective, many media sources speculated that large institutions are finally ready to enter the digital assets “ecosystem.” While the markets pondered possible institutional participation, France cut retail cryptocurrency tax rates (down from 45% to 19%). Nasdaq announced it is open to starting a cryptocurrency exchange. Similarly, Goldman Sachs announced its opening of a cryptocurrency trading desk, and Bermuda (among other countries) is seeking to create a stabilizing framework to foster digital asset businesses*.

There were many exciting announcements about EOS that we believe collectively contributed to its sizeable gain over the month. Toward the end of March, Block.one, the developer of EOS announced the creation of a joint venture fund, EOS Global. The fund will make investments in Asia-focused projects that utilize the EOS blockchain. This news comes on the heels of similar partnerships announced by Block.one that seek to build upon the global community using EOS. In addition to this, EOS was listed on several significant exchanges, including Upcoin and Upbit. On April 15, holders of EOS were also able to take advantage of an airdrop2 and were rewarded in the form of eosDAC tokens3. Lastly, and to many the most important piece of EOS news, was the anticipated launch on June 3 of the EOS main net, signaling the end of its testing phase.

TRX, the second best performing digital asset in the MVDA10 during April, was propelled higher by the announcement of an airdrop and the launch of its own main net4. The TRX airdrop was made to investors holding greater than one Ether in their wallets and started on April 27. TRX, like EOS, will also be moving off the Ethereum blockchain into its own main net on May 31**.

As most digital assets do, when afforded the opportunity, we believe ADA benefited from both its listing on a new exchange (Huobi) and the addition of trading pairs on the popular exchange, Binance.

BCH’s performance may be attributed to general market sentiment, but also the anticipation of an upcoming hard fork5 on May 15. There has also been an uptick in BCH conferences and meetups held globally.

NEO’s rise may mainly be attributed to the development team’s European tour. On April 14, they began traveling throughout Europe promoting their technology to potential clients, investors, and European regulators. NEO was also added to the Cobinhood exchange.

The bottom five digital assets in the MVDA10 also contributed positively to performance in April, albeit to a lesser extent. Ether (ETH) finished the month strong, up +66%, despite regulatory uncertainty around classification as a security. Its price increased from $407.45 to $678.83. XRP (XRP) increased from $0.52 to $0.84, representing a gain of +63%. Dash (DASH) rose from $323.54 to $479.66, marking a gain of +48%. Bitcoin (BTC), the largest digital asset by market cap, increased from $7,159.44 to $9,284.96, a comparatively modest increase of +30%. Finally, the worst performing asset for the month was Litecoin (LTC), finishing up +24%, moving up from $121.61 to $150.60.

April 2018 Performance

Chart of April 2018 performance for Digital Assets in the MVDA10 index

Source: MV Index Solutions GmbH (MVIS®). MVIS is a wholly owned subsidiary of Van Eck Associates Corporation. Data as of April 30, 2018. Not intended to be a forecast of future events, a guarantee of future results or investment advice.  

High short-term performance of this strategy may not be repeated. Investments in digital assets are speculative and volatile. Investments in digital assets can be very risky, especially for inexperienced investors. All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Past performance is no guarantee of future results.  

It is not possible to invest directly in an index. Indices are not securities in which investments can be made. Index returns do not reflect a deduction for fees and expenses. Exposure to an asset class represented by an index is available through investable instruments based on that index. MVIS CryptoCompare Bitcoin Index measures the performance of a digital assets portfolio which invests in bitcoin. MVIS CryptoCompare Digital Assets 10 Index is a modified market cap-weighted index which tracks the performance of the 10 largest and most liquid digital assets.  

MVIS does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. MVIS makes no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. MVIS is not an investment advisor, and it makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth in this document.  

For information regarding the MVDA10 and other MVIS digital asset indices, please visit www.mvis-indices.com/indices/digital-assets.

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Focusing on Gold’s Resilient Base https://www.vaneck.com/blogs/gold-and-precious-metals/focus-on-golds-resilient-base/ Gold’s price floor continues its rise, staying steady amid concerns over geopolitical risks, trade tensions, and inflation.

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VanEck Blog 5/9/2018 12:00:00 AM

Gold Trended Higher Early, But Ended April Slightly Down as Dollar Strengthened

Gold trended higher in early April due to trade tensions between the U.S. and China, prospects of airstrikes on Syria, and heightened inflation expectations following a higher than expected March Producers Price Index (PPI)1 and a 2.1% annual rise in the core Consumer Price Index2. Gold topped at $1,365 per ounce on April 11. This level has been the proverbial price ceiling for gold since 2014. Gold subsequently moved lower as a number of generally positive economic releases enabled the U.S. dollar to trend to its high for the year on May 1. Gold was also pressured by real rates that moved higher with U.S. Treasuries. The yield on the 10-year Treasury surpassed 3% for the first time since 2013. For the month, gold incurred a small loss of $9.65 (0.7%) to finish at $1,315.35 per ounce.

Despite No Surprises in Earnings, Gold Stocks With Small Gains

While there was a lack of positive surprises in first quarter earnings, gold stocks were still able to eke out gains as the NYSE Arca Gold Miners Index (GDMNTR)3 rose 1.7% and the MVIS Global Junior Gold Miners Index (MVGDXJTR)4 advanced 1.8%.

Gold’s Resilient Price Floor Has Been Rising Since 2015; Likely to Be Tested Again

While $1,365 per ounce has been the ceiling for the gold price, the floor has been rising consistently since 2015 in a positive trend of higher lows. The base of this trend is currently around the $1,285 per ounce level. As expectations for a June 12 Fed rate increase mount, gold might test the trend’s base in the coming month. Given the resilience the gold price has shown amid concerns over geopolitical risks, trade tensions, and inflation, we would be surprised to see gold fall below this level. Perhaps gold will take another run at $1,365 in the second half of 2018.

Response to Earnings Highlights Lack of Interest in Gold Stocks

A lack of interest in gold stocks over the past year has caused them to fall short of performance expectations, which we highlighted anecdotally in our March commentary. In an April report, RBC Capital Markets was able to quantify this by looking at performance following earnings beats and misses over the last five years. They found that the sustainability of gains from earnings beats has declined in the last two years. Meanwhile, losses on earnings misses have gotten much worse in the last 1-2 years and the loss is sustained over a longer period. RBC also found that the value traded per day in 2018 is at levels last seen at the end of the bear market in 2015, when gold bottomed at $1,050. This points to a lack of buying interest. Absent are those momentum players that follow the winners who beat and value players that pick up the losers who miss. While this lack of interest sounds negative, we are excited by the opportunity it presents. We believe gold equities are undervalued, and the companies are fundamentally sound. A spark that moves the gold price through its $1,365 ceiling may rekindle interest in the miners.

“Gold is Where You Find It”

According to an old prospector saying, “Gold is where you find it”. Many of the companies we follow have found it in very out-of-the-way places. Not next to a highway in Ohio, but near a glacier in British Columbia, in the Atacama desert at 14,000 feet altitude, or 10,000 feet underground in South Africa. Companies must be skilled at building infrastructure in these remote areas.

Understanding Geopolitical Risk

Gold is also often found in places with geopolitical risk. In order to invest in a company, we must be convinced geopolitical risk can be mitigated, if not eliminated by management. Geopolitical risk comes in various forms at the national, state/provincial, and local levels. The most common risks at the national level are changes in taxes or royalties and import/export restrictions. At the state/provincial level, there are risks of legislation that might make mining prohibitively expensive. At the local level, disgruntled groups may blockade an operation and unions sometimes engage in work stoppages. These risks tend to be higher in emerging or frontier countries; however, developed countries are not immune. For example, the largest open pit gold operation in Ontario, Canada has delayed expansion plans to 2026 due to a lack of support from a local Aboriginal community.

Conversely, places assumed to be politically risky to a generalist may, in reality, be very favorable mining jurisdictions. The West African nation of Burkina Faso is one of the best places to build a mine. The gold industry is growing and exciting discoveries are being found. The permitting process is straightforward and efficient. A mining culture has developed, and materials and supplies are becoming more available. While the general election in 2015 was not without drama, in the end there was a peaceful transfer of power. The gold industry is a significant part of the Burkina economy that no leader wants to disrupt.

Argentina and the Impact of Geopolitics on Gold Projects

One of our more successful investments historically was Andean Resources. In 2007, Andean discovered high-grade veins on the Cerro Negro property in Santa Cruz Province of southern Argentina, a part of Patagonia. By 2010, Andean had delineated a 2.5 million ounce reserve, and the company was sold to Goldcorp, Inc. (2.9% of Fund net assets*) for $3.4 billion. The stock gained 1,800% from our first investment in 2007 to the 2010 acquisition. By 2010 it became obvious that the administration of former president Cristina Elisabet Fernández de Kirchner was driving the Argentinian economy into a ditch. The last geopolitical straw came in 2011, when exchange controls were announced and we began to avoid the country due to its growing hostility towards mining and other business.

We took a renewed interest in Argentina in 2015 with the election of Mauricio Macri. President Macri has invigorated business by unwinding exchange controls, export duties, capital restrictions, and many other impediments left from 12 years of Kirchner rule. This year we returned to Argentina to visit gold properties and assess the geopolitical climate. Cerro Negro is now one of Goldcorp’s core operations, producing 452,000 ounces in 2017 with a reserve of 4.9 million ounces. The Macri Administration eliminated a tax on reserves that had essentially stopped exploration spending. Goldcorp started drilling again, and they were proud to show off the Silica Cap discovery. Silica Cap is a vein system that we estimate could bring over 2 million ounces into the reserve.

Drilling the Silica Cap system

Photo courtesy of Joe Foster. Drilling the Silica Cap system. Silica Cap outcrops visible as dark patches on skyline.

Another highlight of the trip was Yamana Gold’s (2.7% of Fund net assets*) Cerro Morro project, also a high-grade vein system that aims to start production in May. Yamana was able to draw on its expertise from similar operations in Chile and Mexico. We expect to see a smooth start-up that ramps to 180,000 ounces of gold and 7 million ounces of silver annually.

Yamana and Goldcorp have assets across the Americas, so their exposure to Argentina is limited. While we were pleased with the progress companies are making, there are still concerns that keep us from investing in a pure play in Argentina. Unions continue to exert extraordinary power. They are involved in many aspects of planning and decision-making at the mine level. Work stoppages are not uncommon, sometimes for reasons unrelated to mining that are beyond the control of management. Provincial rules can differ widely. Across the border in Chubut Province, open pit mining and the use of cyanide is banned, which is effectively a ban on gold mining. Inflation is running at 25%, and it remains to be seen if the central bank can bring it back to acceptable levels. Mary Anastasia O’Grady of the Wall Street Journal leads an April op-ed with: “Are Argentines ready to throw off the yoke of peronista populism, thuggery, and politics by roadblock that has destroyed their nation, and to rebuild the free republic of the 19th century?” If Macri can maintain popularity into the December 2019 elections while continuing reforms and taming inflation, then perhaps Argentina again becomes an investment destination for us.

Download Commentary PDF with Fund specific information and performance

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Aging Baby Boomers: Implications for Munis https://www.vaneck.com/blogs/muni-nation/aging-baby-boomers/ From state pensions, healthcare, and education to municipal bonds, the growing rate of retiring baby boomers will likely have far-reaching effects.

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VanEck Blog 5/8/2018 12:00:00 AM

By 2035, the elderly will outnumber young people for the first time in American history.i Or so say new projections released by the U.S. Census Bureau. This graying of the U.S. population is largely attributable to the aging baby boomer generation, which is retiring in ever-increasing numbers. The number of people over the age of 65 is growing by about 3% per year—four times faster than overall population growth.ii This developing demographic shift will likely have profound and far-reaching impacts on state pensions, healthcare, education, and more, and consequently on the municipal bond market as well.

State Pension Budget Pinch

As baby boomers retire, state budgets are likely to feel a significant financial pinch when it comes to pension obligations. It is simple math: with a shrinking proportion of working-age adults-to-retirees, there may simply not be enough revenue to support the generous pensions that many states’ defined benefit plans have promised, the unfunded liabilities of which already stood at some $574 billion as of 2011.iii This will probably necessitate a reduction in services, an increase in taxes, pension reforms, or some combination of the three. States could look to address some of these issues by offloading funding obligations to local governments. This, in turn, could prove to be a major problem for municipalities, which, on average, depend on state governments for a third of their revenue.iv As state governments grapple with unfunded pension liabilities, local governments may need to raise property taxes to generate additional revenue as they are forced to shoulder an increasingly high share of the cost of delivering essential services to residents.

Looming Healthcare Gaps

Much has been made of the looming funding gaps facing Social Security and Medicare, and rightfully so, as demographic trends point to an eye-popping $100 trillion shortfall in funding for these federal programs over the coming decades.v However, there is another ticking time bomb that may prove far more relevant to state and local governments as the population ages, and has received far less attention: Medicaid, which helps pay for the healthcare of low-income citizens and their children, the disabled, and the elderly. As of 2014, Medicaid spending for those over 65 accounted for around 20% of all Medicaid costs, and this figure will probably grow in the coming years.

Thanks to Medicaid’s status as a joint federal/state program, states’ shares of the spending can range from 17% to a statutory maximum of 50%. However, while Social Security and Medicare are funded out of trust funds, state funding for Medicaid are drawn from the states’ general revenues. It already accounts for roughly 17% of state general budget expenditures, on average, and are already the second-highest spending category.vi

Education Squeeze

Although Medicaid spending today is already a large line item, it is dwarfed by state spending on education. The 50 states devote an average of 35% of their respective budgets to education, making it the largest single category of expenditures in state budgets.vii Some states, such as Utah, where one in five residents is a student, spend upwards of 50%, while others, such as Illinois, with its unfunded pension obligations, spend significantly less than the average (in Illinois’ case, just 25%).viii

What happens to education funding when state budgets are squeezed by ballooning Medicaid costs and unfunded pension obligations on a historic scale? After all, the two expenditures have already been chewing up the highest proportion of state budgets since the 1960s.ix States could be forced to cut education spending. Indeed, this is already happening. State funding for higher education and state revenue sharing has been in decline since 2008.x

These cuts to state education spending could also further exacerbate inequality in poor school districts that cannot rely on high property taxes to raise the funds necessary to cover a shortfall. Already, in 23 states, state and local governments are spending less in poorer school districts than they are in more affluent ones.xi In some states, the discrepancy in spending between the poorest and richest districts can reach as high as 33%.

Opportunities in ETFs

Individual investors in municipal bonds have long basked in the relative “security” of the overall credit quality and reliability of the income stream. But some of the underlying tremors identified here suggest that, without forgoing the opportunity for tax-free income, the allocation of investible resources in a municipal fund, such as an ETF, may offer added protection. Simply, a portfolio of 10 different bonds cannot provide the same level of security as an ETF with 1,000 different bonds. The challenges discussed are most certainly significant to the baby boom generation, as they are to the entirety of those investing in tax-free income, but ETFs can offer investors a way to access potential opportunities.

Post Disclosure  

i NPR. “Projections Show an Aging U.S. Population.” Mar. 14, 2018

ii Fuchita, Yasuyuki, et al. Growing Old: Paying for Retirement and Institutional Money Management after the Financial Crisis. Brookings Institution Press, Nomura Institute of Capital Markets Research, 2011.

iii Ibid.

iv Kiewiet, D. Roderick, and Mathew D. McCubbins. “State and Local Government Finance: The New Fiscal Ice Age.” Annual Review of Political Science, vol. 17, no. 1, May 11, 2014, doi:10.1146/annurev-polisci-100711-135250.

v Ibid.

vi Ibid.

vii US Census Bureau. “State Government Finances Summary Table.” 2016 Annual Survey of State Government Finances Tables, United States Census, Feb. 2, 2018.

viii Ibid.

ix The Wall Street Journal. “Why Are States So Strapped for Cash? There Are Two Big Reasons.” Mar. 29, 2018.

x Ibid.

xi The Washington Post. “In 23 states, richer school districts get more local funding than poorer districts.” Mar. 12, 2015.

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Keeping Eyes Peeled for a Bearish Turn https://www.vaneck.com/blogs/allocation/keeping-an-eye-on-next-bear-market/ A prudent approach to tactical equity allocation can facilitate participation and help mitigate loss.

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VanEck Blog 5/4/2018 12:00:00 AM

Authored by Steve Blumenthal, CIO and Executive Chairman, CMG Capital Management Group, Inc.

Markets and economies move through multi-year periods of expansion and contraction. However, at 54%, secular bull markets have occurred only about half the time historically.1 Furthermore, the U.S. equity market has spent 70% of its time either in a bear market or recovering from one.2

The chart below highlights the secular bull and bear markets, where the shaded grey areas are the bull markets and the white areas are the bear markets. The S&P 500’s average gain per annum during these secular bull periods was 13.8% vs. -4.0% annualized during the secular bear periods.

A Look at Secular Trends
Monthly Data, January 31, 1900 – March 31, 2018

A chart showing S&P 500 Index performance during secular bull and bear cycles

Source: Ned Davis Research. Data as of March 31, 2018. Past performance is not indicative of future results. Data plotted to logarithmic scale. Copyright © 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.

Where the market is in the secular cycle becomes an important financial planning consideration for investors, especially as they near retirement and would begin to need investment income. An investor’s approach to investing would typically vary depending on which secular period the market is in.

The Need to Navigate Secular Trends

The chart below helps illustrate the importance of navigating secular trends and, in particular, bear cycles. During bear periods, the greater the loss, the greater the gains needed just to break even. Managing the risk of deep and extended periods of loss is critical for long-term success and peace of mind. Limiting losses can help increase market participation by potentially reducing the amount of time and return needed to recoup such losses.

Gains Required to Recover from Losses

A graph showing the gains needed to recover from losses

Source: VanEck. For illustrative purposes only. The figures shown above were achieved by means of a mathematical formula and do not reflect results of any one investment. They help illustrate how, for example, a 50% loss requires a 100% gain to recover that loss.

Prudent Asset Allocation

When you buy a stock, you are really buying its future earnings. Each share’s price can be viewed as the discounted present value of its expected future earnings. Prices change when expectations change, which can happen for many reasons. However, the market’s overall health may be gauged by measuring the trend and magnitude of industry-level price changes.

Different indicators can be applied to assess market health in order to help determine prudent equity allocations. One simple example of such prudence would be the aim to be fully invested when the overall health of the market is strong and rising and, as importantly, to reduce exposure to the market when it is weakening and declining.

An Investment Opportunity

Strategies that follow trends may be used to minimize downside market risk by, for example, signaling when to weight and underweight fully U.S. large cap equity market exposure. The Ned Davis Research CMG US Large Cap Long/Flat Index (NDRCMGLF) follows a proprietary model to measure market health and tactically allocate to U.S. equity to help perform with less risk than being fully invested 100% of the time. This guided allocation process is designed to help investors participate and preserve. Investors may complement their equity holdings by accessing this systematic trade strategy in a tax-efficient ETF.

VanEck Vectors® NDR CMG Long/Flat Allocation ETF (LFEQ) seeks to track the NDRCMGLF Index. The NDRCMGLF Index is maintained by NDR, whose technical research experts have been developing trade strategies for institutional asset managers globally for more than 35 years. The co-indexer, CMG, is a registered investment advisor specializing in managing and executing trend-following trading strategies since 1992.

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Q&A with David Semple: Emerging Markets Opportunities and Concerns https://www.vaneck.com/blogs/emerging-markets-equity/q-and-a-david-semple-opportunities-concerns/ From rising rates and signs of protectionism to areas of strong structural growth, Portfolio Manager David Semple shares his thoughts on what’s ahead for emerging market equities.

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VanEck Blog 5/2/2018 12:00:00 AM

As the second quarter of 2018 progresses, we spoke with Portfolio Manager David Semple to get his views on what to watch in emerging markets equities.

VanEck: Emerging markets have outpaced their developed counterparts in recent memory. With that in mind, what are your expectations for the remainder of this year and beyond in the emerging markets?

David Semple: Fundamentals on the ground in emerging markets are looking pretty good. That’s not to say there aren’t concerns. For instance, trade, tariffs, and protectionism have been rearing their ugly heads over the last few weeks, and we are keeping an eye on how these issues may develop. It would be disappointing if things progressed in a negative direction, but it’s not inconceivable. Clearly there’s some concern globally that rates in the developed markets might increase too much, too quickly and engender a bit of a slowdown. However, generally speaking, emerging markets are fairly early in their business cycles as opposed to a maturing developed market. Overall we believe things look positive.

VanEck: Some of the overall success recently in the emerging markets was a currency story. What’s your outlook there?

David Semple: I don’t pretend to be a currency expert. It’s incredibly difficult to predict currency swings on a day-to-day, week-to-week, or even a month-to-month basis. However, when looking at the U.S. dollar, I am concerned about twin deficits - current account and fiscal deficits. Typically as these expand, it tends to be dollar negative. There does not appear to be an egregious mispricing of currencies, which does not really matter in the short-term.

VanEck: Where do you see opportunities within emerging markets?

David Semple: Last year there were certainly some concerns on the narrow leadership within emerging markets, meaning a few stocks really leading the market forward. This year I think it will be broader-based. Some of the leaders in the emerging markets last year, such as Alibaba, Tencent, and JD.com, were the emerging markets’ equivalent of the FANG stocks (Facebook, Amazon, Netflix, and Alphabet's Google). We own some of those leaders in our portfolio and in my opinion, the outlook is still positive for companies like Tencent and Alibaba. The business model for these types of companies do morph over time and that may give people some anxiety, but we see a very strong structural growth story in those companies.

I think that there are also other areas to be excited about. One of the sectors we like, very broadly speaking, is financials at this stage in the cycle. When interest rates tick up, the financial sector tends to respond positively. These companies have better margins as rates increase, and their credit costs at this stage in the cycle tend to be less. It’s a good place to be, especially as asset growth may be picking up. It’s been a one-way street in terms of credit to GDP actually decelerating in emerging markets. Perhaps the animal spirits are back and companies will become more aggressive and begin borrowing more for CapEx or even for mergers and acquisitions. This behavior is not really typical of emerging markets companies overall, but at least as investors, we are seeing that strong structural growth story developing.

VanEck: David, thanks so much for taking the time to share your thoughts.

David Semple: You’re welcome. Thank you.

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Where Does Gold Come From? The Stars! https://www.vaneck.com/blogs/gold-and-precious-metals/where-does-gold-come-from/ Scientists recently discovered that gold is created in the collision of two neutron stars.

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VanEck Blog 4/30/2018 12:00:00 AM

Authored by Tom Butcher, Associate Director, VanEck

Ever wondered where gold comes from? OK, you dig it out of the Earth, you pan for it in rivers, you recover it from old cellphones, etc. But that doesn’t explain how it’s actually “made”? Well, late last year, we found out how.

On August 17, 2017, a cataclysmic event trillions of miles away from Earth in outer space resulted in two stunning things: 1) the first detectable burst of gravitational waves; and (to me, no less interesting) 2) an explanation of how gold is “made”.

The cataclysm, the results of which so many observatories around the world witnessed on that and following days, was the “collision” between (merging of) two neutron stars in the galaxy NGC 4993, located in the constellation Hydra, about 130 million light years from Earth.

Apart from making (gravitational) waves, when these particular balls of pure neutrons (each about 10 kilometers wide and each with a mass equivalent to that of our sun) collided, amongst the other heavy elements created in the explosion, and shot every which way into surrounding space as a huge cloud of gas, were an estimated six billion trillion metric tons of pure gold. Or about the same mass as the Earth!

A (Neutron) Stellar Collision!1

An illustration of the expanding cloud of debris stripped from two neutron stars just before collision

Source: NASA Goddard Space Flight Center/CI Lab

Unfortunately, none of this gold is going to end up on Earth in our lifetime, if ever. Instead it will, over forthcoming eons, become just some of the substance of new stars, planets, moons, and other heavenly bodies.

The question, then, is: If these collisions have been going on for billions of years, why is there so little gold on Earth to be dug up, panned, etc.? Surely there should be more of it around—indeed a great deal more?

The answer’s a really interesting one. When you subtract what’s reckoned to lie in the Earth’s outer crust and underlying rocky mantle from the gold that should actually be in Earth, some 99% does, indeed, appear to be “missing.” Now, while you may be thinking that it’s nearly impossible to misplace roughly 2,000 trillion metric tons of gold, Professor Bernard Wood of the Department of Earth Sciences at the University of Oxford provided me the logical explanation (and a reminder of the importance of prepositions). Although technically the missing gold may not be on Earth, it’s actually in the Earth - not as a massive nugget to be discovered, but in its core and, therefore, inaccessible.

But how it got there is equally as interesting. Professor Wood once again provided me with the answer. Gold is very soluble in iron. When it was forming, the Earth was still a ball of molten iron (and other metals) and as its iron-rich core separated from both the mantle and crust, it dissolved the gold (and other noble metals) and took them with it to the center of the Earth. Where it (and they) have remained ever since!

The “ore” in core perhaps?

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Fundamentals Overshadowed by Market Volatility https://www.vaneck.com/blogs/natural-resources/fundamentals-overshadowed-by-volatility/ The broad trends impacting global markets in the first quarter, primarily higher volatility, had a direct effect on the natural resources markets.

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VanEck Blog 4/26/2018 12:00:00 AM

1Q’18 Hard Assets Strategy Review

During the quarter, VanEck's hard assets strategy returned -5.51% (measured by VanEck Global Hard Assets Fund, Class A (GHAAX), excluding sales charge). On a relative basis, the Fund outperformed its natural resource equities-based benchmark, the Standard & Poor’s® (S&P) North American Natural Resources Sector Index (SPGINRTR), which returned -6.04% over the same period.

Market Review

The broad trends that impacted global capital markets in the first quarter of 2018, primarily higher volatility fueled by uncertainty around the direction of U.S. economic policy, had a direct effect on the commodities and natural resources markets.

While most commodity prices were up on the quarter, equity market volatility caused many natural resource equities to underperform their respective commodity counterparts. For example, WTI crude oil, gold, and agriculture commodities were up approximately 7.5%, 1.7%, and 3.2%, respectively, during the quarter while energy, gold mining, and agriculture stocks were down approximately 5.9%, 5.5%, and 0.6%, respectively. The exception during the quarter was diversified metals and mining where, though collectively down around 4%, stocks outperformed absent support from underlying base and industrial metals prices, which were down approximately 6.2% on concerns over a global trade war.1

What may be lost or misunderstood for many investors during the current environment is the fact that commodity fundamentals and supportive trends remained intact during the quarter:

  • Despite expanding U.S. onshore supply, global oil markets were stable with inventories continuing to fall and demand remaining firm.
  • Fed rate hiking risks, and the potential for further weakening in the U.S. dollar, helped establish a positive trend in gold prices.
  • For the calendar year of 2017, total earnings by diversified metals and mining companies nearly tripled that of 2016, highlighting the commitment to the return of capital to shareholders.
  • Water shortages in Argentina and drought in Kansas pushed up soymeal and wheat prices and, late in the quarter, the U.S. Department of Agriculture acreage report indicated significantly lower corn and soy planting than expected.

Top Quarterly Contributors/Detractors
As of March 31, 2018

Chart showing the top quarterly contributors/detractors

Source: FactSet; VanEck. Data as of March 31, 2018. Contribution figures are gross of fees, non-transaction based and therefore estimates only. Figures may not correspond with published performance information based on NAV per share. Past performance is not indicative of future results. Portfolio holdings may change over time. These are not recommendations to buy or sell any security.

Outlook

At the peak of capital expenditure reduction efforts in the metals and mining industry, companies and investors became highly critical of how production and operational capital—or “growth capital”— was being employed. Shareholders demanded that excess cash be returned via dividends and/or used to reduce debt so that companies could operate more efficiently, rather than be spent on further expansionary efforts. Simultaneously, as economies began conceptualizing future demand growth, and given the advent of clean energy technologies such as electric vehicles, the need for more metals such as copper, nickel, graphite, and cobalt became abundantly clear. Eventually this created, what we believe to be, an ideal environment for these companies: relatively balanced supply/demand fundamentals, sustainable commodity prices, low cost structures, high cash flow, and the desire of most companies to return capital to shareholders.

For the last year, we have been examining how such a reform process, when applied to the U.S. energy market, has the potential to transform that industry, too. We noted last quarter how energy companies, especially those in unconventional oil and gas exploration and production, are increasingly under the microscopes of investors after years of heavy investment in acreage and infrastructure build out. Exploration and production (E&P) companies are now transitioning from “investment” to “harvest” mode, with mature, cash-flow heavy business enabling dividends and share repurchases, and participating only in rational, accretive acquisitions. At the end of the quarter, two of our U.S. unconventional energy holdings with operations focused in the Permian Basin announced an $8 billion M&A deal, the largest in the “patch” since 2012. The transaction should result not only in some very important economies of scale and efficiencies for both the parties involved, but also improve crude fundamentals as fewer players should lead to better discipline.

All this being said, and while we believe the industries we follow are in the best fundamental shape that they have seen in years, fundamentals can be, and often are, overlooked in declining equity markets. The divergence in performance between commodities and natural resource equities seen in the last quarter—and, to some extent, most of the last four quarters—highlights the impact that broad equity market risk can have on the space. That is why our investment philosophy has been, and continues to be, to look for long-term growth. Positioning our portfolio for the future, and not just reacting to current circumstances, is of paramount importance and our focus remains on companies that can navigate both commodity and equity price volatility and help grow sustainable net asset value.

Download Commentary PDF with Fund specific information and performance.

For a complete listing of the holdings and performance, please visit VanEck Global Hard Assets Fund (GHAAX).

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Real Yields Revisited https://www.vaneck.com/blogs/emerging-markets-bonds/real-yields-revisited/ Real yields in emerging markets have remained attractive, even as they continued to decline in developed markets.  

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VanEck Blog 4/24/2018 12:00:00 AM

Real yields in emerging markets (EM) have remained at compelling levels over the past few years even as they continued to decline in developed markets, and even as nominal yield levels declined in some EM countries. All else equal, currencies associated with higher real yields are generally expected to perform better than those with relatively lower real yields. And as the chart below shows, the real yield pictured in emerging markets is as attractive as it has been in five years.

Real 10-Year Local Interest Rate, %
As of March 31, 2018

A line chart of real 10-year local interest rates

Source: VanEck and Bloomberg LP. Data as of March 31, 2018. Local 10-year nominal yields in the US, G4 (US, Eurozone, UK, and Japan), and 18 EMs adjusted for trailing year-on-year headline inflation. GBI-EM Broad Diversified weights applied to EM rates to construct the aggregate EM rate. Past performance is no guarantee of future results. For information purposes only.

Last summer we examined why real yields matter to emerging markets bond investors. Given the persistence of the real yield advantage, we believe it is worth revisiting why investors should focus on real yields.

Real yields are nominal yields adjusted for inflation, which is often one of the greatest contributors to the nominal yield levels of emerging markets local currency bonds. These higher nominal yields provide compensation for the risk posed by local inflation, which can be associated with negative currency returns. Controlled inflation can provide support to local currencies, and when combined with relatively high nominal yields (therefore resulting in positive real yields), fixed income assets may be particularly attractive.

From a policy perspective, positive real yields provide central banks the ability to ease monetary policy to spur growth, a policy tool that is not currently available in most developed markets. Overall, positive real yields can therefore be a better indication of fundamental value versus nominal yields.

Relative to developed markets, emerging markets local rates appear attractive in both nominal and real terms, despite rising real yields in the United States. As of March 31, 2018 the weighted average 10-year yield on the J.P. Morgan GBI-EM Global Diversified Index was 6.26%, versus the 10-year U.S. Treasury yield of 2.74%. In real terms, EM were yielding 2.85% above inflation, which was 2.26% more than U.S. Treasuries and 3.60% more than the G-4 (U.S., United Kingdom, Japan and Eurozone) average, which actually remains well into negative territory.

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The Role of Green Bonds in the Climate Challenge https://www.vaneck.com/blogs/etfs/green-bonds-in-climate-challenge/ The “climate challenge” is one of the most complex issues facing the world, and green bonds are well-positioned to address this challenge.

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VanEck Blog 4/23/2018 12:00:00 AM

The “climate challenge” is one of the most complex issues facing the world today. A year after launching the VanEck Vectors® Green Bond ETF (GRNB®) and in recognition of Earth Day, we revisit the role that green bonds can play in the transition to a low-carbon economy.

Where We Are Today

2017 was another record year for green bond issuance, once again nearly doubling the issuance of the prior year, an encouraging trend that reflects the growing demand for sustainable investments. But discouragingly, 2017 also saw a rise in CO2 emissions for the first time in four years. It was one of the hottest years on record (2016 was the hottest) and one characterized by extreme weather events and the most expensive hurricane season ever. It’s clear that more needs to be done, and quickly, if the goals of the Paris Agreement are to be achieved.

Nearly 200 countries ratified the Paris Agreementi in 2015, pledging to reduce greenhouse gas emissions to limit global warming to less than 1.5-2 degrees Celsius above pre-industrial levels. Each signatory must develop and maintain target reductions in emissions, and in 2017 several countries, most notably France, issued green bonds to help finance these efforts.

The Paris Agreement was dealt a blow when the U.S. announced its decision last June to exit the Agreement. While disappointing, the impact of the withdrawal is unclear and progress will likely continue (see Paris Exit Won’t Squash Green Bonds). The rest of the world has reaffirmed their support, and many U.S. cities, states, and companies have pledged to help deliver on the U.S. emissions reductions targets. Encouragingly, the U.S. was actually the largest issuer of green bonds in 2017.ii

Still Moving Forward

Although progress may have felt uneven in 2017, there is palpable momentum not only in the growing issuance of green bonds, but also the increasing recognition of the risks of climate change and the magnitude of the challenge. The World Economic Forum’s 2018 Global Risks Report identified environmental risks among the most significant systematic risks facing the world in terms of likelihood and impactiii. In addition to the immediate physical impact of climate change and the financial risks associated with stranded assets, secondary risks can include food and water shortages, social unrest, and large-scale involuntary migration.

An estimated $1 trillion in new investment is needed annually to transition to a low-carbon economyiv. This is in addition to the massive infrastructure spending needed to modernize existing and build new infrastructure to address population growth – all of which will need to be low/no carbon emissions. Overall, up to $90 trillion in new infrastructure investment will be the estimated need through 2030v . This significant investment need creates potential financing opportunities for investors, and green bonds are well suited to meet this challenge.

The Role of Green Bonds

Green bonds are like conventional bonds, except that the proceeds are used only to finance environmentally friendly projects. Investors do not need to adopt new or untested structures. Many green infrastructure projects are long-dated in nature, require significant upfront investment, and generate ongoing cashflows. As a result, green bonds will likely be a significant part of the overall financing of green projects, in addition to equity, loans, and other financing types. Most green bonds are backed by the full balance sheet of the issuer, allowing investors to direct capital towards specific projects without taking on the direct risk of the project.

At the same time, the full spectrum of bond types, credit enhancement structures, and risk transfer mechanisms are available in the green bond space. For example, 2017 saw innovations such as green sukukvi, green commercial mortgage backed securities (CMBS), and the largest green sovereign bond to date. The massive size of the global fixed income market, the array of structures available, and the inherent flexibility of the Green Bond Principles have put green bonds at the forefront of addressing the climate challenge.

Focus on Transparency

Increased and more standardized disclosure related to climate risk assessment and management has long been at the top of ESG (environmental, social, and governance) investor demands. Regulators are accelerating the push to help quantify and evaluate these risks. For example, in 2015 France began mandating carbon disclosure for listed companies and carbon reporting for institutional investors. Similarly, in 2017 the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) released its final recommendations for financial disclosures, taking into account various climate scenarios with the underlying assumption that climate risks are, or could become, material to investors and impact the risk-return profile of an organization. To date, over 250 organization have expressed support for the TCFD’s recommendations.vii

By disclosing the use of proceeds of green bond issues, as well as developing green bond frameworks to identify, assess, and manage climate risks and investments, green bond issuers are in many ways ahead of the curve. And to the extent that the market does begin to adequately factor in climate-related risks into market pricing, entities that are proactively addressing and disclosing these risks will likely benefit.

Facing the Climate Challenge

The cost of the climate challenge is so significant that it can be difficult to grasp, as are the potential consequences of failing to mitigate or adapt to climate change. The accessibility of green bonds, therefore, make them an extremely valuable tool to address this challenge.

Because green bonds are like conventional bonds, and have similar risk and return profiles, investors of all types – large and small, traditional and those with an ESG mandate – can seamlessly incorporate them into their portfolios. Policymakers have begun to provide guidance to the market, which will help promote standardization and reduce risk to green bond issuers and investors. We feel the green bond market is well positioned to play a leading role in meeting the global climate challenge head on.

To learn more about green bonds, request our whitepaper: “Income with Impact: A Guide to Green Bonds”.

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Moats React to Continued Global Volatility https://www.vaneck.com/blogs/moat-investing/moats-react-to-global-volatility/ The global market sell-off that began in February gained renewed momentum by mid-March, pushing moat companies and major market indices lower by month-end.

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VanEck Blog 4/23/2018 12:00:00 AM

For the Month Ending March 31, 2018

Performance Overview

The volatility and sell-off experienced across markets in February continued to some degree in March, with varying impact on moat companies. International moats, as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), led the MSCI All Country World Index ex-USA again in March (-1.35% vs. -1.76%, respectively). The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") lagged the broad U.S. market as represented by the S&P 500® Index (-3.49% vs. -2.54%, respectively).

International Moats: Utilities’ Time to Shine

There were several bright spots among moat-rated companies in the International Moat Index in March. Driven by ENN Energy Holdings Ltd. (2688 HK, +15.91%), Gas Natural SDG SA (GAS SM, +3.92%), and China Resources Gas Group Ltd. (1193 HK, +2.92%), utilities was the top contributing sector to the index despite its relatively small weighting. Medical technology firm Elekta AB (EKTAB SS, +16.06%) was the top performer in the index, following strong third quarter results that point to a continued recovery for the firm. Despite these strong performers, the International Moat Index could not escape March’s deteriorating market conditions. Financials was the top detracting sector from index performance, with Australia bank Westpac Banking Corp. (WBC AU, -10.08%) leading the sector’s underwhelming performance. Westpac, Australia’s oldest bank, continued to trade at a discount to Morningstar’s fair value estimate at month-end. MGM China Holdings Ltd. (2282 HK, -12.40%) also struggled in March following a long-term run-up in the major Macau gaming companies since late 2016. Interestingly, Morningstar now views these companies as near or over fair value. At the index’s first quarter review in late March, ENN Energy Holdings Ltd., Elekta AB, and MGM China Holdings Ltd. were removed from the index.

U.S. Domestic Moats: Two Is a Crowd

Healthcare was once again the culprit driving the U.S. Moat Index’s weak performance. The sector has been overweight in the index since early 2016 and has experienced multiple swings in performance as several headline-worthy events unfolded. Remarks by President Trump, innovative private healthcare announcements, and the attempted repeal of the Affordable Care Act have all impacted the sector since early 2016. Patterson Companies Inc. (PDCO US, -29.61%) inflicted its last bit of damage on the U.S. Moat Index prior to exiting the index at the March review as a result of its moat rating downgrade. L Brands (LB US, -22.54%), another volatile index constituent in recent months, continues to face near-term headwinds, resulting in a fair value estimate reduction in mid-April by Morningstar analysts. Morningstar does still believe in L Brands’ long-term moat rating but is continuing to monitor its store’s growth plans, namely Victoria’s Secret. Excluding the two aforementioned worst performers, the index performed more in-line with the broad U.S. market.

 

(%) Month Ending 3/31/18

Domestic Equity Markets

International Equity Markets

(%) As of 3/31/18

Domestic Equity Markets

International Equity Markets

(%) Month Ending 3/31/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Total Return
Allergan PLC 9.12
TransDigm Group Inc 6.46
Veeva Systems Inc Class A 4.76
Microchip Technology Inc 2.73
Starbucks Corp 1.38

Bottom 5 Index Performers
Constituent Total Return
Patterson Companies Inc -29.61
L Brands Inc -22.54
Wells Fargo & Co -10.27
Bank of New York Mellon Corp -9.64
AmerisourceBergen Corp -9.41

View MOAT's current constituents
View MWMZX's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Total Return
Elekta AB B 16.06
ENN Energy Holdings Ltd 15.91
KION GROUP AG 8.36
GKN PLC 7.67
KDDI Corp 5.16

Bottom 5 Index Performers
Constituent Total Return
MGM China Holdings Ltd -12.40
SINA Corp -10.83
GEA Group AG -10.55
SoftBank Group Corp -10.08
Westpac Banking Corp -8.44

View MOTI's current constituents

As of 3/16/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
McDonald's Corp MCD US
Procter & Gamble PG US
General Mills Inc GIS US
Dominion Energy Inc D US
Campbell Soup Co CPB US
Hershey Foods Corp HSY US
Cheniere Energy Inc LNG US
Microchip Technology Inc MCHP US
Comcast Corp A CMCSA US
Franklin Resources Inc BEN US
PepsiCo Inc PEP US

Index Deletions
Deleted Constituent Ticker
Visa Inc A V US
VF Corp VFC US
Polaris Inds Inc PII US
The Bank of New York Mellon Corp BK US
Veeva Systems Inc A VEEV US
United Technologies Corp UTX US
TransDigm Group TDG US
CBRE Group Inc. CBG US
Bristol-Myers Squibb BMY US
Emerson Electric Co EMR US
Patterson Cos Inc PDCO 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
Beijing Enterprises Holdings Ltd. China
LINE Corp Japan
GEA AG Germany
Unilever United Kingdom
Vodafone Group United Kingdom
Grupo Aeroportuario del Pacifico, Mexico
Sun Hung Kai Properties Ltd. Hong Kong
KION Group AG Germany
SK Telecom Co Ltd South Korea
Genting Singapore Plc Singapore
Koninklijke KPN NV Netherlands
Beijing Capital International Airport Co. Ltd. China
Brambles Industries Ltd Australia
Banco Bilbao Vizcaya Argentaria SA Spain
Rolls-Royce Holdings Plc United Kingdom
CapitaLand Mall Trust REIT Singapore
Uni Charm Corp Japan
Capitaland Ltd Singapore
Symrise AG Germany
Svenska Handelsbanken A Sweden
LafargeHolcim Ltd Switzerland
Hong Kong Land Hldgs Ltd China
Smiths Group United Kingdom
Grifols SA Spain
Seven & I Holdings Co Ltd Japan
Kubota Corp Japan

Index Deletions
Deleted Constituent Country
Cameco Corp Canada
Canadian Pacific Railway Ltd Canada
Enbridge Inc Canada
Cemex SA CPO Mexico
America Movil SAB de CV L Mexico
Embraer S.A. Brazil
Airbus SE France
Sanofi-Aventis France
Luxottica Group SpA Italy
Crown Resorts Ltd Australia
Sonic Healthcare Ltd Australia
Westpac Banking Corp Australia
AMP Ltd Australia
Commonwealth Bank Australia Australia
QBE Insurance Group Ltd Australia
Magellan Financial Group Limited Australia
Inditex SA Spain
Telefonica SA Spain
MGM China Holdings Ltd Hong Kong
Roche Hldgs AG Ptg Genus Switzerland
Elekta B Sweden
Sina Corp (Caymans) China
ENN Energy Holdings Ltd China
DBS Group Holdings Singapore
Overseas-Chinese Banking Singapore
KBC Group NV Belgium

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



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Tariffs, Treasuries, and Tech https://www.vaneck.com/blogs/emerging-markets-equity/tariffs-treasuries-and-tech/ Emerging markets equities gained in Q1, and the outlook remains bright as investor concerns appear to be more noise than actual threats.

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VanEck Blog 4/19/2018 12:00:00 AM

A Rollercoaster Start to 2018

The first quarter of 2018 was a true rollercoaster for global investors. Markets rose substantially in January, driven by optimism relating to both strong and synchronized global growth and the passage of tax reform in the United States. This was quickly shattered as investors began to worry about possible inflation and rising interest rates, and the announcement of tariffs by the U.S. on steel and aluminum and against Chinese imports further exacerbated market volatility. Investors felt torn between a reluctance to bid farewell to the bull market and the apparent risks emanating from tech, higher interest rates and a potential trade war between the globe’s two largest economies.

Consequently, country performance in emerging markets ranged between negative and positive 12%. Brazil, Pakistan, and Egypt led emerging markets in the first quarter of 2018, whereas the Philippines, Poland, and Indonesia lagged. On a sector level, healthcare, energy, and utilities performed best in emerging markets. Consumer discretionary and telecom both detracted from performance.

Areas to Watch

Early in the quarter, there was concern about the increase in U.S. interest rates and whether the U.S. Federal Reserve might be more aggressive in terms of rate increases. However, the emerging markets saw little impact. While the Fed is addressing a maturing business cycle, the emerging markets are, at best, mid-cycle.

The announcement of tariffs by the U.S. (and increasing protectionism) raised concerns around the form and extent of the reactions and the nature of any subsequent “tit for tat”. On the one hand, China and most developing markets do not play on a level playing field, and judging from the communist party’s agenda, as outlined in the party thought, this is going to be hard to change. On the other hand, the unilateral imposition of tariffs, such as the U.S. has done, is completely against World Trade Organization (WTO) rules.

The technology sector bore the brunt of the market shakeout globally due to regulatory risk in developed markets, the potential of a trade war, and profit taking, and it is an important sector in emerging markets. It is the largest sector in terms of weighting in the Morgan Stanley Capital International Emerging Markets Index (MSCI EM). We don’t believe much has changed in terms of the growth outlook for the sector, despite a slight negative revision in analysts’ earnings expectations during the quarter. However, we continue to watch carefully for any potential risks arising from a change in the regulatory framework in the countries they operate in. Unlike in developed markets, technology companies in emerging markets (especially in China) have been operating within strict guard rails since their inception, and therefore, in our opinion, face a lower risk of unforeseen regulatory events that might impact the sector meaningfully.

Strategy Review and Positioning

Large caps and value stocks slightly outperformed growth and small cap stocks, hurting the emerging markets equity strategy’s performance relative to the MSCI Emerging Markets Investable Market Index (MSCI EM IMI). Exposures in consumer discretionary and staples, and information technology added to the strategy’s relative performance, while lack of exposure to the energy sector and selection in materials detracted from performance. On a country level, exposures in Spain, India, and Mexico contributed positively whereas selections in China and Brazil detracted.

Top Performers/Detractors

The top performing stock for the quarter was CIE Automotive, a Spanish company that manufactures a variety of car parts. Active in emerging markets countries, including Brazil, China, Mexico, and India, the company executed very well during the quarter. Chinese company Alibaba Group Holdings not only continued to execute well with a business model able to address changing opportunities, it also announced good results for 2017. CP All Public Co., which operates the 7-Eleven convenience store franchise in Thailand and its cash and carry subsidiary, produced good results. Finally, Chinese private education company TAL Education Group continued to execute well and announced much improved results for 2017.

The largest detractors included Chinese utility Beijing Enterprises Water Group, which suffered as a result of concerns about a slowdown in orders and construction as financing gets tighter for public/private partnerships in the waste water treatment area. Shares in South African based media giant Naspers fell on investor disappointment over capital allocation after the company, very profitably, reduced its holding in Chinese company Tencent Holdings by 2% at the end of March. Motilal Oswal Financial Services, an Indian financial services group suffered as the Indian market continued to underperform. Bharti Infratel, a provider of telecom tower and related infrastructure in India, experienced pressure on its stock as a result both of its parent having sold down its stake in the company and a disadvantageous change in its customer mix.

Tailwinds Overcome Headwinds to Support Strong Outlook

The outlook for emerging markets remains bright in our view. Global growth and actual trade are both good. Tariffs aside, right now, there are no real macroeconomic issues around emerging markets. In fact, macro has actually boost in some places, such as South Africa, where the election of Cyril Ramaphosa has helped boost sentiments towards its economy.

China’s Xi Jinping, also known as the President or Chairman of everything, has gotten a lot of people worked up by abolishing presidential term limits. However, this can mean a higher likelihood of policy continuation, including anti-corruption, supply-side measures and strengthening financial regulations, which are generally good for investors. In the long run, concentration of power is usually a bad thing, but for the average investor investment horizon, it should prove positive.

We continue to focus on uncovering and investing in structural growth opportunities across emerging markets. Our answer to all the current noise is our enhanced and disciplined due diligence process, which provides us with a higher degree of confidence and conviction when making investment decisions.

Download Commentary PDF with Fund specific information and performance.
For a complete listing of the holdings in VanEck Emerging Markets Fund (GBFAX) as of 3/31/18, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

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Sentiment Changes on Stocks https://www.vaneck.com/blogs/allocation/sentiment-changes-on-stocks/ The Fund decreased its stock allocation this month from 71% to 66% and increased its bond exposure to 34%.  

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VanEck Blog 4/18/2018 12:00:00 AM

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

March Performance Summary

The VanEck NDR Managed Allocation Fund (the “Fund”) returned -0.99% versus -0.99% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) in March.

The Fund had a moderate stock overweight in March. Our asset class positioning detracted from performance as global stocks fell. We held a 71% allocation to stocks, a 28% allocation to bonds, and a 1% allocation to cash. Global stocks returned -2.14% and bonds returned +0.64%. The Fund’s regional equity positioning performed well. We benefited from overweight positions in the Emerging Markets and Japan. The largest regional equity detractor from performance was our overweight exposure to the U.S. The positioning within the U.S. detracted from performance primarily due to our overweight exposure to large-cap growth stocks.

Total Returns (%) as of March 31, 2018
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
-0.99 -1.50 8.69 9.85
Class A: Maximum 5.75% load -6.69 -7.17 2.45 6.46
60% MSCI ACWI/
40% BbgBarc US Agg.
-0.99 -1.02 9.63 9.78
Morningstar Tactical Allocation
Category (average)1
-0.89 -1.62 7.09 7.99

Total Returns (%) as of December 31, 2017
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
0.79 15.15 15.15 12.44
Class A: Maximum 5.75% load -5.01 8.55 8.55 8.46
60% MSCI ACWI/
40% BbgBarc US Agg.
1.17 15.77 15.77 11.86
Morningstar Tactical Allocation
Category (average)1
0.95 12.61 12.61 10.49

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

Returns less than a year are not annualized.

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

April 2018 Positioning: Stock Decreased but Still Overweight

We decreased our stock allocation in April from 71% to 66%, increased our bond allocation from 28% to 34%, and decreased our cash allocation from 1% to 0%. Our regional equity allocation shifts included decreased allocations to Europe ex. U.K., Japan, and the U.S. The U.S. equity allocation changes include a larger allocation to large-cap growth and a smaller allocation to large-cap value.

Asset Class Positioning vs. Neutral Allocation, April 2018

Chart showing asset class positioning vs. neutral allocation for April 2018

Weight-of-the-Evidence

The market is reacting to powerful forces: potential trade wars, concerns about inflation, and rising interest rates. These are complex issues. Trying to predict successfully how these scenarios will unfold and impact the market is no small feat. We spoke of how the model reacts to market events on a recent investor call. Our friends and partners at Ned Davis Research participated, and Lisa Michalski, Associate Director at Ned Davis Research, commented: “What does the model predict? It doesn’t predict anything. It responds to events as they happen.” This is exactly right.

The model responds to events that are not specifically included in it from reading the market. Global markets respond quickly. We use this to our advantage. Heavily incorporating market price action and investor sentiment allows us to quickly adapt to the risks in the market. Since the beginning of the selloff, we have reduced our equity exposure by 20%.

The most recent indicator to change from neutral to bearish is U.S. investor sentiment. This is a contrarian indicator designed to measure and respond to investor psychology. It comprises various components, such as investor surveys, asset flows, implied volatility, and trading volume. As you can see from the chart below, investor sentiment quickly changed from a state of extreme optimism to a state of extreme pessimism in March. This led to our reduction in equities from 71% to 66% in April alone.

NDR U.S. Sentiment Indicator

Line chart showing NDR’s U.S. Sentiment Indicator

Source: Ned Davis Research. Data as of March 31, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.
Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Our current asset class positioning, near neutral, is reflective of the conflicting evidence collected from the indicators. Right now, market technical readings are mixed, investor sentiment is bearish, stock valuations are stretched, global growth is strong, and global monetary policy is accommodative—a real mixture of pros and cons pointing neither up nor down.

NDR Indicator Summary

A summarized view of NDR’s indicators

Additional Resources

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Time to Buy Muni Bond CEFs at Deep Discounts? https://www.vaneck.com/blogs/muni-nation/muni-closed-end-funds-deep-discounts/ Municipal bond closed-end funds trading at deep discounts may present an attractive buying opportunity.

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VanEck Blog 4/12/2018 12:00:00 AM

Municipal bond closed-end funds (CEFs) are currently trading at very attractive discounts (market price below net asset value). We feel this may present a buying opportunity for investors.

Premium/Discount: CEFs Held by VanEck Vectors CEF Municipal Income ETF (XMPT)

Line chart showing premiums/discounts on municipal bond closed-end funds held by VanEck Vectors CEF Municipal Income ETF (XMPT)

Source: VanEck. Data as of 4/9/2018. Past performance is not indicative of future results.

Dividend Cuts and Rising Rates

Among the various reasons behind these discounts are dividend cuts, which are mostly attributable to rising U.S. short-term interest rates. Many of the larger muni closed-end funds have cut their dividend over the past few months, with the majority having done so at the end of 2017. These cuts have ranged anywhere from 1% to 16%, with the average at approximately 11%.

Higher short-term rates have increased the borrowing costs for leveraged funds. As a result, the spread (long-term bond income minus the cost of short-term borrowings) made on the leveraged assets has decreased. Along with lackluster performance, discounts appear to have widened further as the marketplace became aware of the dividend cuts. This led to further selling, adding to the downward pressure on prices.

The Fed is expected to continue to hike the Fed funds interest rate over the course of 2018. Beyond short-term rate increases, rising long-term rates can also hurt asset values, and fears of long-term rates going higher in the near-term may also deter investors.

A Buying Opportunity?

While in the near term, discounts may widen a bit further, we encourage investors to monitor the space closely and consider current levels in what may be a potential buying opportunity. The current discounts of CEFs may offset to some degree the impact of any potential dividend cuts. In addition, we believe the discounts will likely narrow if buyers come back into the market chasing higher yields.

The VanEck Vectors® CEF Municipal Income ETF (XMPT®) can provide investors a simple option for holding a diversified basket of muni closed-end funds. The fund seeks to track an index with a modified net asset-weighting methodology, designed specifically to take advantage of the inherent inefficiencies of closed-end fund trading. This methodology underweights CEFs trading at premiums and overweights CEFs trading at discounts, creating a natural buy-low and sell-high approach.

Post Disclosure  

The Fund's performance, because it is a fund of funds, is dependent on the performance of the Underlying Funds. The Fund is subject to the risks of the Underlying Funds' investments, and the Fund's shareholders will indirectly bear the expenses of the Underlying Funds. In addition, at times certain segments of the market represented by the Underlying Funds may be out of favor and underperform other segments. The shares of a closed-end fund may trade at a discount or premium to its net asset value (NAV). Additionally, the securities of closed-end investment companies in which the Fund will invest may be leveraged. As a result, the Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of closed-end investment companies that use leverage may expose the Fund to higher volatility in the market value of such securities and the possibility that the Fund's long-term returns on such securities (and, indirectly, the long-term returns of the Shares) will be diminished. Investment in the underlying funds may be subject to municipal securities risk, high-yield securities risk, fixed-income securities risk, tax risk, liquidity risk, leverage risk and anti-takeover measures risk. A portion of the dividends you receive may be subject to the federal alternative minimum tax (AMT). There is no guarantee that Fund's income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value.

Fund shares are not individually redeemable and will be issued and redeemed at their net asset (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results.

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Cooling late-cycle economy could rekindle interest in gold https://www.vaneck.com/blogs/gold-and-precious-metals/cooling-late-cycle-economy/ Indications of a late-cycle economy are becoming more evident, and rising risk and volatility may lead investors back to gold.

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VanEck Blog 4/10/2018 12:00:00 AM h1.blog-post.title { width: 97% !important; }

Gold extended its two-year trend of higher lows

Gold's price action in March was very constructive, even though it only advanced $6.62 (0.5%). Since the Fed began raising rates in December 2015, the gold market has shown weakness in the weeks ahead of each rate decision. This pattern was repeated once again, as the low for the month was $1,306 per ounce on March 21, the day the Fed announced its sixth 0.25% rate increase since it began raising rates. The Fed-induced lows in 2017 were in the $1,200 to $1,240 per ounce range, whereas the March 2018 low ($1,306) was much higher, extending the positive trend of higher lows to over two years. Gold was propelled to its high for the month of $1,356 per ounce on March 27 following the Trump Administration's announcement of tariffs targeting Chinese goods. China's immediate response was modest in comparison and gold finished the month at $1,325 per ounce.

Demand from India is weak, but bullion ETF demand solid

Physical demand in India has been weak for a couple of years now due to import restrictions, taxation, and currency changes. We have been expecting demand to return to normal. However, in February, Bloomberg reported weak Indian imports which suggests the gold market in India continues to struggle. While we wait for favorable developments from India, the positive trend in prices has been driven by investment demand for gold bullion exchange traded products (ETPs). Global bullion ETPs have seen steady inflows since early 2017 and holdings have now reached levels last seen in 2013.

Lack of interest, misguided cost concerns fueling gold equity underperformance

Gold equities outperformed gold bullion in March, as the NYSE Arca Gold Miners Index (GDMNTR)1 gained 2.9%, while the MVIS Global Junior Gold Miners Index (MVGDXJTR)2 advanced 2.2%. Perhaps gold stocks have begun to claw back the performance they have lost relative to gold this year. In the first quarter, gold equities underperformed gold by 7.2%, while junior miners underperformed by 7.8%. We normally expect gold equities to advance with gold, which has gained 1.7% so far this year. There are several reasons for the underperformance:

  1. A lack of interest in safe-haven3 investments: While volatility has returned to markets this year, it has yet to reach worrying levels that might motivate investors to hedge their exposure. RBC Capital Markets reports the six-month trailing beta to gold of the VanEck Vectors® Gold Miners ETF has declined to 1.5x, compared to a historical average of 2.0x. The corresponding betas for the VanEck Vectors® Junior Gold Miners ETF is 1.7x and 2.2x, respectively. General investor apathy towards the miners was also evident at the BMO Global Metals and Mining Conference 2018 in late February. BMO commented anecdotally that institutional investor interest in precious metals was at levels last seen in the early 2000s, before gold's bull market.
  2. Market worries that a new cycle of mining cost inflation has begun: Several companies have guided to higher all-in mining costs in 2018 and we have seen some press and research that suggests costs are beginning to rise. Since 2012, industry average all-in mining costs have fallen roughly 25% to around the $900 per ounce level in 2017. Based on company guidance so far, we reckon these costs will likely rise to roughly $925 in 2018. After talking with many producers about their cost drivers, we believe cost concerns are overblown and that costs will fluctuate around the $900 level for the foreseeable future. Many companies have long-term contracts for materials and consumables. Some have hedged fuel and currencies at low levels. It seems the labor market has tightened somewhat in Australia, but companies are not reporting any wage pressures globally. In fact, BMO Capital Markets sees the all-in costs of the gold companies in their coverage universe declining 8% in 2019.
  3. Gold stocks have yet to recover from the early February sell-off: Investors viewed the general market sell-off as an overdue correction, rather than the reemergence of systemic risks. This interpretation precluded a flight to safe havens, causing gold and especially gold stocks to sell-off with the market in early February. As a result, RBC Capital Markets notes that the gold producers are trading at a roughly 20% discount to their historic valuations. So far, the general sell-off has been too short to benefit safe havens. In a February report, Goldman Sachs finds that it usually takes a month or so of equity drawdown for gold to start to act like a hedge.

Cracks appear in market and investor psychology

It appears that the confidence and complacency that has dominated the U.S. stock market for several years is now beginning to dissipate. Investor psychology is changing, the market is no longer bulletproof, and many of the high flying stocks are coming down to earth. Social media is facing a reckoning, as Facebook has become embroiled in a widening scandal over user data. Unfortunate mishaps for Tesla and Uber suggest autonomous driving may be much more difficult to achieve than expected. Regulators and tax authorities are targeting cryptocurrencies, while hackers target their exchanges.

Indications of late-cycle economy and rising inflation more evident

The U.S. Commerce Department reported retail sales fell in February for the third month in a row, while the University of Michigan Consumer Sentiment Index4 jumped to a 14-year high and the Conference Board Consumer Confidence Index5 hovers near 17-year highs. This suggests that while times are good for most people, they have little desire to spend more in an economic expansion that is one of the longest on record. Households may save their gains from the Trump tax cuts, rather than spend in the economy, as the Commerce Department reports the savings rate ticked higher in February.

We believe these are signs that the post-crisis economic and stock market cycle is approaching its end. There are also many signs indicating core inflation could move beyond the Fed's 2% target. The S&P CoreLogic Case-Shiller Index6 is 6.3% higher than its 2006 peak. A shortage has led lumber to record highs. Freight costs are near 20-year highs. General Mills CEO Jeff Harmening was quoted in The Wall Street Journal, "we are seeing an unprecedented rise in logistics costs". In the 12 state Midwestern region, job openings outnumber out-of-work job seekers. Idaho workers led the nation with a 5.3% increase in earnings in 2017 thanks to labor shortages. The Fed's February Beige Book saw employers raise wages and expand benefit packages in response to tight labor market conditions in most districts. Layered on all this are new tariffs that could raise the costs of a wide range of goods.

Historically, tightening does not end well

With core inflation at 1.8%, it is likely that inflation achieves a "two-handle" (2%) soon, and rather than risk falling behind the curve, the Fed might tighten more aggressively. This would also be classic late-cycle behavior. The track record of the 13 hiking cycles since 1950 compiled by Gluskin Sheff7 leaves little room for optimism:

Fed hiking cycles, 10 landed in recession

Table showing that in 13 Fed hiking cycles since 1950, 10 have resulted in recession

Source: Haver Analytics, Gluskin Sheff.

In addition, many other countries are enjoying growing economies. A February report by HSBC economist Stephen King identified all periods since 1990 in which the world economy has delivered synchronized growth. Mr. King finds that each was followed by some kind of economic or financial shock, attributed to excessive optimism and unanticipated shifts in monetary policy.

Increased risk and volatility should lead investors back to gold stocks

If we are right in our late-cycle assessment, gold and gold stocks stand to benefit if the current market, characterized by confidence and complacency, transitions to one filled with risks and volatility. We believe that once generalist investors take the time to assess gold stocks, they will like what they see — companies with strong balance sheets, cost containment, and good cash flow run by managements incentivized by profitability and shareholder returns. Under the right conditions, it probably won't take long for the global gold mining sector with a market capitalization of just $250 billion to fill the valuation gap and regain its historic beta to gold.

Download Commentary PDF with Fund specific information and performance

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NDRCMG’s Market Pulse: De-risking in response to market health https://www.vaneck.com/blogs/etfs/ndrcmg-response-to-market-health/ VanEck Blog 4/10/2018 12:00:00 AM

Taking some chips off the table

Negative momentum, as measured by the Ned Davis Research CMG US Large Cap Long/Flat Index's (NDRCMGLF Index, or the Index) model, has triggered a trade signal to incrementally step out of the market to an 80% equity allocation. The model has allocated to 100% equity since its last signal change at the end of December, having avoided changes during February's volatility, which led to a 10% drawdown and rebound. However, more recent price action has indicated a greater breakdown in overall market breadth; i.e., market health, as the model responded to negative trends reinforced since February, led mainly by the technology, financial, and health care sectors.1

Since February, reactions to the escalating trade tariffs and an embattled technology sector have induced a more pronounced risk-off market sentiment. Despite what has been considered a strong global fundamental environment, accompanied by positively received tax reform and moderated inflationary concern, the S&P 500® Index was down 2.1% year to date, as of 4/6/2018.

S&P 500 Index year-to-date cumulative return (%)
1/1/2018 – 4/6/2018

Line chart showing year-to-date cumulative returns for the S&P 500 Index, as of April 6, 2018

Source: FactSet. Data as of April 6 2018. 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 disclosures below.  

The NDRCMGLF Index rebalanced from 100% to 80% equity on April 10, as the model's composite score is currently under 70 and its directional trend went negative in response to the more recent broader market breakdown. Should the model's composite score turn up and trend positive, it will reallocate to 100% equity. However, if the negative trend persists, pushing the model's composite score below 60, for example, it will signal greater market breakdown and a 40% equity allocation, as illustrated in the table below.

Allocations based on both the composite score and its directional trend

How allocations are determined, based on both the composite score and its directional trend

*Note: The composite score zone must be surpassed for the equity allocation change to be in effect. As an example, assuming the composite direction is down; i.e., a deteriorating/declining trend, if the score is 53 and it drops to 50, then the allocation is still 40%. The score must drop below 50 to move the allocation to 0%. Assuming the composite direction is up; i.e., an improving trend, it will always allocate 100% to the S&P 500, regardless of the current composite score. For illustrative purposes only.  

How the NDRCMG model works

The NDRCMGLF Index's model measures the overall health of the market through an evaluation of market breadth. In this case, market breadth refers to advancing and declining price trends and countertrends at the GICS®2 industry level. The model computes a robust moving average score daily3 to capture multi-industry and multi-term trend and countertrend measures to gauge overall market health. It then calculates the score's directional trend to see if it is improving or declining. Collectively, the score and its directional trend determine the equity allocation of either 100%, 80%, 40%, or 0% − in which case it would be allocated to cash.4

Why market breadth is ideal for guided equity allocation

There are a few key reasons why measuring market breadth provides sound trend analysis for guiding equity allocations. The Index's co-developer, Steve Blumenthal of CMG Capital Management Group, Inc., wrote a whitepaper, Risk Management for all Markets, detailing this tactical approach. Mainly, market breadth has typically weakened before top-line prices have at major market peaks and breadth thrusts5 often occur just before major bull market recoveries. Furthermore, the S&P 500® is considered a very efficient market, meaning the underlying securities' fundamentals and macro environmental factors tend to be priced in almost immediately.

Investors can access this equity risk-managed approach through VanEck Vectors® NDR CMG Long/Flat Allocation ETF (LFEQ), which was developed to offer guided equity allocation by trading into and out of the market automatically for its investors. This strategy seeks to minimize losses from potential market drawdowns typical of traditional buy-and-hold or static strategies.

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Opposites attract: Market outlook favors barbell approach https://www.vaneck.com/blogs/emerging-markets-bonds/opposites-attract/ VanEck Blog 4/5/2018 12:00:00 AM h1.blog-post.title { width: 85% !important; }

Our outlook for 2018 is characterized by the continued normalization of interest rates in both the U.S. and Europe, and the U.S. Federal Reserve has already signaled more aggressive rate hikes to come. This environment favors reduced exposure to developed markets rates, which are still low but rising, and reducing duration. We feel that combining emerging markets local currency bonds with floating rate investment grade bonds can allow investors to position their fixed income portfolios for this current environment.

Unlike a traditional barbell which is based on maturity, this approach is primarily risk-based. It combines the diversification and yield potential of emerging markets bonds with the relative safety of U.S. dollar denominated investment grade corporate debt that also has a duration of nearly zero. Although these two asset classes are divergent in many ways, they share a common trait that is crucial in today’s environment: low or negative return correlation to U.S. treasury bonds.1

Over the past year, the barbell portfolio would have performed similarly to a portfolio that used traditional fixed rate corporate bonds for its corporate exposure on an absolute basis, and outperformed on a risk-adjusted basis. Although there is a give-up in yield, returns benefitted from the lower duration.

A barbell portfolio for the current environment
As of March 31, 2018

Table showing that risk barbell has outperformed

Source: J.P. Morgan, MVIS, ICE Data Indices, LLC and Morningstar, as of 3/31/2018. EM Local Bonds is represented by the J.P. Morgan GBI-EM Global Core Index. US IG Floating Rate is represented by the MVIS® US Investment Grade Floating Rate Index. US IG Fixed Rate Corporate Bonds is represented by the ICE BofAML US Corporate Index. Index returns are not representative of fund returns. Past performance is no guarantee of future results. Indices are unmanaged and are not securities in which an investment can be made. See below for index description.

In the current environment, we continue to favor the barbell approach. In addition to being better positioned against rising interest rates in the U.S., this portfolio may benefit from other global tailwinds. For example, although credit spreads are tight relative to historical averages, they may be justified given the current benign environment, and we expect positive fundamentals to remain supportive of U.S. credit. Further, we do not see a clear catalyst for renewed U.S. dollar strength in the near term, while synchronized global growth, rising commodity prices and improved fundamentals continue to support emerging markets local currencies.

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Commodities have miles to run on rate hike https://www.vaneck.com/blogs/natural-resources/commodities-on-rate-hike/ ]]> VanEck Blog 3/27/2018 12:00:00 AM

The March 21 announcement by new Fed Chairman Jerome Powell indicated that the Federal Reserve is likely to be more aggressive in its rate hiking policy over the next few years as the effects of reduced business regulation, broad fiscal spending, and stimulative tax cuts are fully incorporated into the economy. After nearly a decade of the effective Federal Funds Rate hovering around 0%, we feel the time for investors to critically evaluate their portfolio's performance in rising interest rate environments has arrived.

Looking at tables of historical performance for a number of asset classes in rate hiking cycles over the last 50 years, perhaps most striking is the performance of commodities—including gold.

Fed funds target rate hikes

Chart of Fed funds target rate hikes

Rate-hike cycle and annualized asset return during hiking cycle (%)

Chart of rate-hike cycle and annualized asset return during hiking cycle

Source: FactSet; Bloomberg; FRED; Robeco. Data as of December 31, 2017. Note: annualized figures derived using monthly returns. "U.S. Dollar" represented by the DXY Index. "U.S. Equities" represented by the S&P 500 TR. "U.S. Treasuries" represented by the Bloomberg Barclays US Treasury TR. "U.S. Credit" represented by the Bloomberg Barclays US Credit TR. "Int'l Equities" represented by the MSCI World ex USA TR. "Gold" represented by gold commodity. "Commodities" represented by the S&P GSCI TR. Past performance is not indicative of future results. This information is being provided for informational purposes only. It is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. No market data or other information is warranted or guaranteed by VanEck.

Commodities and interest rates both tend to rise late in the economic/business cycle. As a normal cycle develops, the economy expands and gains momentum. Demand for commodities also begins to outpace production and existing supply. The Fed generally responds to this economic momentum by raising rates as inflationary expectations begin to rise. The objective is to extend the economic cycle by keeping interest rates at a level that allows the economy to operate at full employment while maintaining its predetermined inflation target (2% in the current cycle). This is why when you look back at prior expansionary economic cycles, commodities tend to rise as the central bank raises rates.

Economic/business cycles are never exactly the same, and the current cycle is no exception. But we are most likely entering the late stages of this expansion. Once again interest rates are rising along with commodity prices. This economic upturn has been the slowest post-war expansion we have experienced and is soon to become the longest. Consequently, the global economic expansion has taken longer than expected but is gaining momentum. Demand is starting to outpace production and available supply in several important sectors.

There are expected, and possibly more aggressive, interest rate hikes over the next several years, and potential commodity supply constraints resulting from years of capital expenditure reductions in the metals and oil industries. Between these, we believe investors have more than enough reasons to reconsider their allocations to this space.

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A Golden Anniversary Present https://www.vaneck.com/blogs/gold-and-precious-metals/gold-anniversary-present/ 2018 marks the 50th anniversary of VanEck’s actively managed gold strategy, which recently received its fifth straight Thomson Reuters Lipper Fund Award. 

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VanEck Blog 3/23/2018 12:00:00 AM

Gold Faced Selling Pressure Early in February Despite Normally Positive Conditions

2018 was always destined to be a special year for VanEck's actively managed gold strategy, which celebrates its 50th anniversary this year. Making the year shine even brighter, the VanEck® International Investors Gold Fund, Class I (ticker: INIIX) was recently awarded a 2018 Thomson Reuters Lipper Fund Award for Best Fund over the 10-year period ending December 31, 2017 in the Precious Metals Equity Funds category.1

This marks the fifth consecutive year, and the sixth time in seven years, that the VanEck International Investors Gold Fund (either Class A or Class I) has received a Lipper Award for Best Fund in its category. The Lipper Fund Awards recognize the top fund in each category for the previous 3-, 5-, and 10-year periods based on risk-adjusted, consistent returns compared to their peers.

2018 Thomson Reuters Lipper Fund Award
Winner - Best Fund in Precious Equity Metals Category

2018 - Class I, 10 Years
2017 - Class I, 10 Years
2016 - Class I, 10 Years
2015 - Class A, 10 Years
2014 - Class A, 10 Years
2012 - Class I, 5 Years

"We're particularly proud to be receiving this recognition as our gold fund is also celebrating a special anniversary in 2018," said Jan van Eck, Chief Executive Officer of VanEck. "It's not only the oldest mutual fund focused on gold equities, but it has consistently been among the top performers over its long history, a fact that speaks volumes about the skill and expertise of the portfolio management team."

The Leader in Gold Investing Since 1968

This year VanEck recognizes the 50th year of its actively managed gold strategy. VanEck was founded in 1955 by John van Eck, and in 1956, he launched the firm's initial mutual fund to help investors gain access to international stocks in Europe and Japan following World War II.

At the same time, he was also seeking his PhD in economics and studied under an Austrian economist who believed that credit cycles drive the world economy. Foreseeing inflationary pressures, John van Eck changed the investment objective of the fund to gold and gold stocks in 1968, an out of consensus move given that gold's price was fixed at $35 an ounce at the time.

This turned out to be the right call, as the U.S. experienced hyperinflation in the 1970s and the country came off the gold standard, sending the price of gold from $35 an ounce to over $800 by the end of the decade. Furthermore, this decision made an indelible mark on VanEck's approach to investing, and continues to shape the firm today.

Still Shining Bright

2018 marks the 50th anniversary of VanEck’s actively managed gold strategy. CEO Jan van Eck discusses its origin and the strategy’s contribution to the firm’s growth and guiding investment philosophy.

Watch Video: Still shining bright

Learn more about VanEck's active and passive gold capabilities and history here.

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The Math Reveals Muni Appeal https://www.vaneck.com/blogs/muni-nation/math-reveals-muni-appeal/ Demand for munis remains solid and their tax-free coupon remains an advantage.

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VanEck Blog 3/20/2018 12:00:00 AM

As we approach the end of the first quarter of 2018, municipal bond performance has thus far followed a lackluster trajectory similar to those of the U.S. Treasury bond market. However, when we take a closer look at the numbers, we see signs that provide support to the asset class.

After a record-setting month of new issuance in December last year, expectations were set for a strong "January effect" as reinvestment dollars chased a significantly diminished new issuance calendar. This did not happen (see Where Was the 2018 January Effect?). Performance so far this year has been somewhat disappointing, but there are two significant characteristics of munis to point to that continues to favor the asset class: (1) ratios (of muni yields to those of U.S. Treasury and corporate bonds) continue to move lower; and (2) the taxable-equivalent yield comparative.

Analyzing the (Ratio) Spread

While evidencing a move towards long-term averages and appearing to be somewhat less than compelling, spread contraction actually tells a story of solid demand for the asset class. Demand keeps yields low, while the secular move to higher rates pushes upwards on U.S. Treasury and corporate bonds.

In one prominent example, the ratio of the Bloomberg Barclays Municipal High Yield Index to the Bloomberg Barclays U.S. Corporate High Yield Index has moved below 100%, but at 88% it remains above the long-term average of 79%.

Ratio of U.S. High Yield Corporate Index to High Yield Municipal Index Yields
10/31/95 - 2/28/18

Chart showing ratio of U.S. High Yield Corporate Index to High Yield Municipal Index Yields from 10/31/95 to 2/28/18

Source: Bloomberg Barclays.

Looking at Taxable-Equivalent Yield

Comparing taxable-equivalent yield1 shows clearly the advantage of munis' tax-free coupon. Simply put, taxable-equivalent yield is calculated by dividing the yield of an AAA-rated (or even an A-rated)2 municipal by one minus the current highest personal Federal tax rate (e.g. 37%). The result can then be compared with whatever comparably-rated U.S. Treasury or corporate bond you might otherwise be interested in purchasing.

Here's an example using figures as of March 9, 2018: The AAA-rated 10-year muni bond yield was 2.49% and the U.S. Treasury 10-year bond yield was 2.89%. Using the formula above, the comparison of taxable equivalency produces a result of 3.95% versus 2.89%. This is a clear 106 basis point advantage from a Federal tax perspective for a municipal bond investment. We believe investors should never overlook this critical, and very simple, piece of analysis. It remains a very compelling reason to continue to allocate to this asset class.

Nominal vs. Taxable-Equivalent Yields
as of 3/9/2018

Chart showing nominal vs. taxable-equivalent yields as of 3/9/18

Source: VanEck.

Post Disclosure  

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

2 The S&P rating scale is as follows, from excellent (high grade) to poor (including default): AAA to D, with intermediate ratings offered at each level between AA and C.

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Models Don’t Panic https://www.vaneck.com/blogs/allocation/models-dont-panic/ The Fund decreased its stock allocation for March from 87% to 71% and increased its bond exposure to 28%.  

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VanEck Blog 3/16/2018 12:00:00 AM

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

February Performance Summary

The VanEck NDR Managed Allocation Fund (the "Fund") returned -4.05% versus -2.88% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) in February.

The Fund was meaningfully overweight stocks in February. Our asset class positioning led to our underperformance as global stocks retreated from the highs achieved in January. We held an 87% allocation to stocks, a 9% allocation to bonds, and a 4% allocation to cash. Global stocks returned -4.20% and bonds returned -0.95%.

The Fund's regional equity positioning benefited from overweight positions in the U.S. and Japan, and an underweight position in Canada. The regional equity detractors from performance included overweight exposures to the Emerging Markets and Europe Ex. U.K. Within the U.S., the Fund's biases to growth over value and large-cap over small-cap helped performance.

Total Returns (%) as of February 28, 2018
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
-4.05 -0.51 11.22 10.95
Class A: Maximum 5.75% load -9.55 -6.24 4.83 7.37
60% MSCI ACWI/
40% BbgBarc US Agg.
-2.88 0.02 11.57 10.71
Morningstar Tactical Allocation
Category (average)1
-3.64 -0.74 8.21 8.92

Total Returns (%) as of December 31, 2017
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
0.79 15.15 15.15 12.44
Class A: Maximum 5.75% load -5.01 8.55 8.55 8.46
60% MSCI ACWI/
40% BbgBarc US Agg.
1.17 15.77 15.77 11.86
Morningstar Tactical Allocation
Category (average)1
0.95 12.61 12.61 10.49

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

Returns less than a year are not annualized.

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

March 2018 Positioning: Stock Decreased but Still Overweight

Although we are still overweight stocks, we significantly reduced the level of risk in the portfolio. We decreased our stock allocation in February from 87% to 71%, increased our bond allocation from 9% to 28%, and decreased our cash allocation from 4% to 1%. The large reduction in our allocation to stocks has resulted in smaller allocations to the individual equity regions. The most notable regional equity reductions were in the U.S., Japan, and Europe ex. U.K. The U.S. equity allocation changes include smaller allocations to large-cap value, small-cap growth, and small-cap value. The allocation to large-cap growth was increased slightly.

Asset Class Positioning vs. Neutral Allocation, March 2018

Fund allocation chart as of March 2018

Source: VanEck. Data as of March 2018.

Weight-of-the-Evidence

Models don't panic. The market has "spoken" and our model is "listening." From its peak on January 26, the S&P 500 Index declined 10.16% to its trough on February 8, as the market reacted to higher interest rates. As we mentioned in last month's commentary, the model does not attempt to anticipate market drawdowns, rather it reacts to them. A continued decline in the markets will be quickly measured by our indicators and, thereafter, reflected in our positioning.

While still overweight stocks, we significantly de-risked the portfolio to reflect the current risks in the market. The model is composed of many indicators designed to determine the overall health of the stock market. Some of those indicators are quick to respond to market events, and others are slower to respond. It is the diversity of indicators that provides a comprehensive view of the market. Let's take a look at the indicators that responded.

Market breadth changed from bullish to bearish. Breadth is a responsive indicator that measures participation. This particular breadth indicator measures the percentage of countries participating in a market rally. Generally speaking, greater participation equals a healthier trend in the markets. As you can see from the chart below, less than 50% of countries are now trading below their intermediate-term moving average.

NDR Global Breadth Indicator

Chart of NDR Global Breadth Indicator

Source: Ned Davis Research. Data as of February 28, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.
Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

U.S. investor sentiment changed from bullish to neutral. Sentiment is a contrarian indicator that seeks to be wary of the crowd at extremes. Warren Buffett once famously said that investors should be "fearful when others are greedy and greedy when others are fearful." That is generally what this indicator tries accomplish. It is comprised of various sentiment measures such as investor surveys, asset flows, implied volatility, and trading volume. The sentiment reading has been at extreme optimism since September 2017. It reversed in February during the market selloff, but is now back in the extreme optimism zone.

NDR U.S. Sentiment Indicator

Chart of NDR U.S. Sentiment Indicator

Source: Ned Davis Research. Data as of February 28, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.
Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

The stock/bond overbought/oversold indicator turned bearish. This indicator measures the relationship of stock returns to bond returns. This indicator reached extremes in January, as stock markets rallied, and then reversed in February, when stock prices corrected, causing it to change from neutral to bearish.

NDR Stock/Bond Overbought/Oversold Indicator

Chart of NDR Stock/Bond Overbought/Oversold Indicator

Source: Ned Davis Research. Data as of February 28, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.
Copyright 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

One indicator that turned bullish is seasonality. Seasonality predicts that March and April will be good months for stocks. Seasonality, while effective over the long-term, is not responsive to current market conditions.

Seasonality Indicator Chart

Source: Ned Davis Research. Past performance is no guarantee of future results. Chart is for illustrative purposes only.
Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

NDR Indicator Summary

NDR Indicator Summary, February 2018

Chart of NDR Indicator Summary, March 2018

Source: Ned Davis Research. Data as of February 28, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.
Copyright 2018. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Additional Resources

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Few Spared in Global Market Sell-Off https://www.vaneck.com/blogs/moat-investing/few-spared-global-market-sell-off/ The global market sell-off in February spared few and erased much of January’s strong gains across the board.

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VanEck Blog 3/9/2018 12:00:00 AM

For the Month Ending February 28, 2018

Performance Overview

Global markets saw a widespread sell-off in February, and moat stocks were no exception. International moats, as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), led the MSCI All Country World Index ex-USA in February by a small margin (-4.61% vs. -4.72%, respectively). The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") trailed the broad U.S. markets as represented by the S&P 500® Index (-4.58% vs. -3.69%, respectively).

International Moats: Navigating the Turmoil with Few Bright Spots

As markets overall struggled, a few international moat-rated companies stood out with strong performance in February. Singapore bank DBS Group Holdings Ltd. (DBS SP, +7.59%) built on previous momentum, posting strong results in February capped by a special dividend for shareholders. Aerospace companies Embraer SA (EMBR3 BZ, +5.95%) and Airbus SE (AIR FP, +4.09%) also had strong performance for the month. The financials sector and German companies were the top detracting sector and country, respectively, while Mexican cement maker CEMEX SAB de CV (CEMEXCPO MM, -20.79%) posted an unexpected fourth quarter loss, which earned it the spot of the worst performing International Moat Index constituent by a wide margin.

U.S. Domestic Moats: Healthcare Not so Healthy

Healthcare, as a whole, dragged significantly on U.S. Moat Index performance in February. The sector accounted for three of the five worst performing constituents: Biogen Idec, Inc. (BIIB US, -16.91%), Stericycle Inc. (SRCL US, -16.84%), and Allergan plc (AGN US, -14.06%). However, several healthcare companies did buck that trend. Bristol-Myers Squibb Co. (BMY US, +5.75%) posted strong fourth quarter results at the beginning of the month, along with positive study results relating to lung cancer treatments. Veeva Systems Inc. (VEEV US, +10.88%), though not a healthcare company, provides client relationship management services to the pharmaceutical industry and posted strong results for the fourth quarter. Meanwhile, home improvement retailer Lowe’s Companies Inc. (LOW US, -14.46%) also disappointed, posting underwhelming quarterly results which drove a fair value downgrade from $93 to $90 by Morningstar equity analysts.

 

(%) Month Ending 2/28/18

Domestic Equity Markets

International Equity Markets

(%) As of 2/28/18

Domestic Equity Markets

International Equity Markets

(%) Month Ending 2/28/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Total Return
Veeva Systems Inc Class A 10.88
Bristol-Myers Squibb Company 5.75
Amazon.com Inc 4.24
CBRE Group Inc 2.32
Salesforce.com Inc 2.05

Bottom 5 Index Performers
Constituent Total Return
Biogen Inc -16.91
Stericycle Inc -16.84
Compass Minerals International Inc -16.30
Lowe's Companies Inc -14.46
Allergan PLC -14.06

View MOAT's current constituents
View MWMZX's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Total Return
DBS Group Holdings Ltd 7.59
Kao Corp 6.21
Embraer SA 5.95
Airbus SE 4.09
China Resources Gas Group Ltd 2.47

Bottom 5 Index Performers
Constituent Total Return
Cemex SAB de CV CPO Terms:2 Shs-A- & 1 Shs-B- -20.79
Industria De Diseno Textil SA -15.36
Vodafone Group PLC -12.10
Enbridge Inc -11.87
Bayer AG -10.63

View MOTI's current constituents

As of 12/15/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Cardinal Health Inc CAH US
Veeva Systems Inc A VEEV US
Merck & Co Inc MRK US
Western Union Co WU US
Microchip Technology Inc MCHP US
NIKE Inc NKE US

Index Deletions
Deleted Constituent Ticker
Berkshire Hathaway BRK/B US
BlackRock Inc BLK US
CH Robinson Worldwide Inc CHRW US
Patterson Cos Inc PDCO US
Polaris Inds Inc PII US
T Rowe Price Group Inc TROW 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
Telecom Italia SpA Italy
Lloyds Banking Group Plc United Kingdom
SoftBank Group Corp Japan
Beijing Enterprises Holdings Ltd. China
Millicom Intl Cellular S.A. - SDR Sweden
Bank of China Ltd H Shares China
Nordea AB Sweden
Gas Natural SDG SA Spain
Bayer AG Germany
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Smiths Group United Kingdom
GKN United Kingdom
Swedbank AB Sweden
TransCanada Corp Canada
KDDI Corp Japan
GEA AG Germany
Danske Bank A/S Denmark
Samsonite International SA Hong Kong
Contact Energy Ltd New Zealand
Vodafone Group United Kingdom
Siemens AG Germany
Grupo Aeroportuario del Pacifico, S.A.B. de C.V. Mexico
Infosys Ltd India

Index Deletions
Deleted Constituent Country
Cemex SA CPO Mexico
Symrise AG Germany
HeidelbergCement AG Germany
China Telecom Corporation Ltd. - H Shares China
ENN Energy Holdings Ltd China
Nippon Tel & Tel Corp Japan
Nidec Corp Japan
Murata Manufacturing Co Ltd Japan
Telefonica Brasil S.A. - Prf Brazil
GlaxoSmithKline United Kingdom
Ansell Ltd Australia
CSL Ltd Australia
QBE Insurance Group Ltd Australia
Novartis AG Switzerland
Julius Baer Group Switzerland
Elekta B Switzerland
Danone France
Safran SA France
Bureau Veritas SA France
Tata Motors Ltd India
DBS Group Holdings Singapore
CapitalLand Commercial Trust Singapore

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



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Gold’s Muted Response Speaks Volumes https://www.vaneck.com/blogs/gold-and-precious-metals/muted-response-speaks-volumes/ Investors’ ambivalence towards safe haven assets despite rising risks and market volatility demonstrate that complacency continues to dominate the markets.

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VanEck Blog 3/9/2018 12:00:00 AM

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

Gold Faced Selling Pressure Early in February Despite Normally Positive Conditions

In an environment that would typically be positive for gold, it appears gold faced selling pressure as investors searched for liquidity to cover margin calls and redemptions. Gold declined in February as increased market volatility and a drop in equity and bond markets failed to support demand for gold as a safe haven1. On February 2, the labor market report in the U.S. showed a strong rebound in average hourly earnings that was well above expectations. The U.S. dollar rallied and gold declined. Equity markets dropped, with the Dow Jones Industrial Average (DJIA)2 down almost 9% by February 8 (ending February down 4%), U.S. Treasury yields rose, and the U.S. dollar, rather than gold, was the beneficiary.

Weaker U.S. Dollar, Heightened Inflation Expectations Helped Gold Reach Month High

On February 14, January's inflation report beat consensus, with headline inflation measured by the Consumer Price Index (CPI)3 accelerating to 2.1% year-on-year. U.S. Treasury yields continued their rise and the U.S. dollar weakened. Meanwhile, the equity markets and gold bounced back. Gold reached its high for the month of $1,353.70 per ounce on February 15.

Gold Rally Loses Momentum as U.S. Dollar Strengthens on Fed comments

However, the gold rally was short lived, as the markets priced in hawkish expectations ahead of the release of Federal Open Market Committee (FOMC) minutes on February 21. The Fed minutes themselves did not contain much new information, but confirmed the market's expectations for three rate hikes this year. In addition, the testimony by new Fed chairman Jerome Powell to the House of Representatives' Committee on Financial Services was viewed as optimistic, stating that he sees gradual rate hikes, and more importantly, an improved U.S. growth outlook. The U.S. Dollar Index (DXY)4 was up 1.7% during the month. Commodities were lower during February, which is also negative for gold. Gold closed at $1,318.38 per ounce on February 28, down 2% or $26.78 per ounce for the month.

Demand for Gold ETPs up YTD Helping Bullion Outperform Gold Stocks

Demand for gold bullion-backed exchange traded products (ETPs) declined in February, with holdings down about 0.3% for the month. This followed a 1.3% increase in holdings in January, resulting in a net 1.1% increase year to date as of February 28. We track the flows into the gold bullion ETPs as we believe investments in those products typically represent longer-term, strategic investment demand for gold and, as such, provide an excellent proxy for the direction of the gold market.

Gold stocks underperformed gold, with the NYSE Arca Gold Miners Index (GDMNTR)5 falling 9.91%, and the MVIS Global Junior Gold Miners Index (MVGDXJTR)6 dropping 6.7% during the month. The junior companies caught up with their larger peers after underperforming in January.

Gold Stocks Impacted by Reaction to Mixed Q4 Reporting, Not Fundamentals

While many gold companies reported positive fourth quarter 2017 operating results, earnings/financial results were mixed and guidance for 2018, in some cases, seems to have surprised the markets. The negative sector headlines put significant selling pressure on the stocks. In many cases, these negative surprises have shorter-term effects, and do not change the companies' fundamental valuations. However, more recently, it appears that selling pressure might be intensified by headline-driven, algorithm-based trading where the longer-term fundamentals are ignored.

The End of the Low Interest Rates Era and the Multi-Decade Bond Bull Market?

It looks like the post-crisis era of ultra-low, below-market interest rates and the multi-decade bond bull market both came to an end in February. In early February the simultaneous fall in both stocks and bonds caught the markets very off guard. Five- and 10-year U.S. Treasury rates jumped up and out of a downtrend that goes back to 1985. The stock market sell-off was a taste of the unintended consequences of Fed policies that encourage investors to take on more risk, driving markets in one relentless direction for nine years. Funds designed to thrive in a low volatility environment were forced to sell in a reinforcing feedback loop, exposing new systemic risks.

Bitcoin Crash Another Sign that Easy Money May Be Over

Another sign of the end of an era of easy money was the bitcoin crash. From its high of $19,511 in December, bitcoin declined 70% to its $5,922 low on February 5. It has since recovered to around $10,000. Bitcoin has already gone through one crash this year and the value of the emerging technology, while potentially disruptive, is still unproven.

Investor Complacency Remains Despite Volatility, Rising Debt, Rising Rates

Safe haven investments showed little reaction to the stock market selloff. Gold and the dollar essentially trended sideways, while U.S. Treasuries headed lower. So far investors are treating the stock market volatility as an overdue correction, however we see it as the beginning of a secular shift in markets and investor psychology that brings more volatility and risk going forward. Perhaps the prelude to a bear market and economic downturn.

It looks like a higher interest rate regime is taking hold. It is not yet clear whether it is being driven by inflationary expectations, Fed rate increases, increasing fiscal deficits, or a combination of all three. Protectionist trade policies, wage pressures, and a weak dollar may cause core inflation to trend through the Fed's 2% target, which may bring more aggressive rate policies. Fiscal deficits projected to rise above $1,000,000,000,000 in a couple of years will cause the Treasury to issue huge quantities of debt at the same time the Fed is reducing its $4,000,000,000,000 hoard of U.S. Treasuries, mortgage-backed securities, and agency debt. (FYI…12 zeroes equals a trillion).

A new era of higher interest rates brings added uncertainty. As these rates rise, equity risk premiums get squeezed, making stocks less desirable. According to Gluskin Sheff7, a 50 basis point rise in rates costs the economy $250 billion in debt service annually. We do not know how the new Fed management will respond to volatile markets and potentially weaker economic growth. Unwinding the Fed balance sheet (quantitative tightening) is an unprecedented financial experiment. Is the February volatility an indication of how a system dominated by passively managed funds, algorithms, and automation will behave?

We believe the muted response from gold and other safe haven investments suggests complacency continues to dominate the markets. In fact, the University of Michigan Consumer Sentiment Index's mid-month reading for February rose unexpectedly to nearly a 13-year high. As the year unfolds, we expect an erosion of complacency and confidence that benefits gold.

Download Commentary PDF with Fund specific information and performance

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Eyeing Emerging Markets and Commodities in 2018 https://www.vaneck.com/blogs/market-insights/eyeing-emerging-markets-commodities-2018/ As U.S. interest rates continue to rise and Europe looking likely to follow, emerging markets and commodities look particularly attractive.

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VanEck Blog 3/1/2018 12:00:00 AM

Watch Video 2018 Investment Outlook

Jan van Eck, CEO, shares his investment outlook.

Watch Now  

Read Full Outlook  



U.S. interest rates are continuing to rise, and Europe looks almost ready to follow suit. As interest rates start to "normalize", opportunities are opening up in emerging markets and commodities.

With our one to two year outlook, we see the fixed income market at a big inflection point. Our prediction is an aggressive 3.5% on the 10-year rate, which is not that far from the current 2.7%, but a jump could still come as a surprise to the market.

If faced with duration or interest rate changes as risk factors, emerging markets and high-yield bonds may present more opportunities than government or investment grade bonds for fixed income investors.

Interest Rates on the Rise

Interest rates globally are "normalizing", kickstarted by the U.S. about two years ago when it stopped quantitative easing and started increasing interest rates.

U.S. Treasury Issuance and Fed QE

Chart showing government bond issuance and ECB QE as of October 2017

Source: IMF, Deutsche Bank Global Markets Research. Data as of October 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice.

Europe is about two years behind the U.S. on this and is showing signs of tightening. The European Central Bank has started reducing its bond purchases, which is a sign that interest rates could turn positive, but it has a trickier market dynamic to navigate. The role of the central bank in Europe is much bigger relative to its market size than in the U.S., so its actions can potentially have a more significant effect on the market and market psychology.

Government Bond Issuance and ECB QE

Chart showing government bond issuance and ECB QE as of October 2017

Source: IMF, Deutsche Bank Global Markets Research. Data as of October 2017. Not intended to be a forecast of future events, a guarantee of future results or investment advice.

Central banks globally have learned to move slowly enough to be fairly predictable, so we think easing will be carried out in an orderly way. However, the possibility of a large impact means the European Central Bank’s activities will still need to be watched closely.

Emerging Markets Attraction

As interest rates in the U.S. and Europe normalize, emerging markets debt can provide investors with portfolio holdings that are not part of that interest rate dynamic. For investors, a key issue with local currency debt is their view on the U.S. dollar. We lean bearish, though if global growth continues, dollar strength would be less of a concern.

On the emerging markets equities side, we think there is still room to run as cash flow for emerging markets stocks continues to grow. After several years of underperformance, investors may still be under allocated to emerging markets equities. As the turnaround in this asset class continues, we expect this to change.

China Economic Health Remains Vital

China holds an important role within the world economy. If China experiences a slowdown, virtually every asset class would be affected.

An interesting development over the past year has been the emergence of "new China". Technology is becoming a major part of the economy, with the market capitalization of tech stocks now making up about a third of the overall market. That is a dramatic transformation from "old China", which was based on manufacturing and property. Balanced growth between consumer-oriented new China and old China would be positive not only for the country itself, but also for global growth.

Commodities the 2018 MVP?

With global growth kicking in and fueling demand, commodities are well positioned for a strong year. Beyond the macro trends, commodity companies have been undergoing a rationalization process over the past few years. This has provided added support for prices.

Commodities are still in a bit of a grind cycle and have not received major attention yet, but significant opportunities are emerging within this space.

Preparing for Bear Market Signals

The world economy is growing, the U.S. economy is growing, and nothing seems radically out of balance in terms of government policy. This all creates a positive environment for equities, but investors have to start thinking about and preparing for a correction.

A central question that one of our investing themes at VanEck looks to address is, "Do you have strategies in your portfolio that will actually adjust to bear market signals?" After 10 straight years of seeing the market going up, it may be hard to think about anything else, but the time may have come for investors to start positioning themselves for a correction.

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Commodities Rally an Uneven Tailwind for Emerging Markets Debt https://www.vaneck.com/blogs/emerging-markets-bonds/commodities-rally-uneven-tailwind/ VanEck Blog 2/22/2018 12:00:00 AM

Commodity prices have been on a steady upswing since early 2016, rising over 40% through January 31, 2018.1 Many investors, assuming a tight link between commodity prices and emerging market local currency returns, fairly view broad emerging markets exposure as a way to play the recovery in commodities.

What's Behind the Correlation?

However, using oil prices as a point of reference, a wide dispersion is seen among individual currencies represented in the J.P. Morgan GBI-EM Global Core Index.

Emerging Markets Currencies Have Varying Correlations to Oil Prices

Chart showing varying correlation of emerging markets currencies to oil prices

Source: Bloomberg. Monthly return correlation from 1/31/13 to 1/31/2018. Oil is measured by the first month WTI crude oil contract on the New York Mercantile Exchange. Past performance is not indicative of future results. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Currencies of oil exporters like Russia and Colombia have exhibited high correlations with oil prices over the past five years. The remaining 16 currencies generally experienced lower correlation, which is perhaps unsurprising given that over 60% of the index comprised net oil importers, as of January 31, 2018.2

The overall moderate correlation of index returns with oil prices reflects the diversity of economies within the index. Despite rising commodity prices since 2016, the majority of emerging markets local currency bond returns over the past five years have been driven by local interest rates rather than currency appreciation.

But overall, the emerging markets local currency bond index exhibits a positive correlation to commodity prices. A continuing commodities rally would likely provide support to emerging markets local currency bonds.

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Emerging in China: A Look at Liquidity, A-Shares, and Sector Trends https://www.vaneck.com/blogs/etfs/emerging-in-china-liquidity-a-shares-sector-trends/ Liquidity improvements and broad sector themes should come into focus for China in 2018.

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VanEck Blog 2/20/2018 12:00:00 AM

By ChinaAMC

China's economic growth accelerated for the first time in seven years in 2017. As we look at what this could mean for 2018, several key themes are already coming into focus as areas to watch.

Signs of Improving Liquidity

According to analysts, the implementation of targeted reserve requirement ratio (RRR) cuts in 2018 will likely lead to notable improvement in market liquidity. Market rates are expected to drop, and the Contingent Reserve Allowance—the regular reverse repurchases and the medium-term lending facilities (MLF) established by the People's Bank of China—indicates that banks may be able to meet the significant liquidity needs brought about by maturing instruments in January.

The Beginning of Allocation

China's economy grew 6.9% year-on-year in 2017. Its fourth quarter gross domestic product (GDP) grew 6.8% year-on-year, slightly beating expectations and signaling that growth is stabilizing. 2018 looks to be a year of full allocation to China A-shares.

In Hong Kong, the short-term stock market correction that started at the end of November drew to a close in mid-December, and Hong Kong equities have returned to an uptrend. Southbound Stock Connect trading continued to see a net buying of Hong Kong equities in the latter half of December, with banking, property, and technology (chips and 5G related) stocks seeing the most net inflows. The absence of more stringent property regulations from the Central Economic Work Conference has reversed the market's pessimistic outlook on the real estate market.

The U.S. Dollar Index (DXY), which measures the value of the U.S. dollar against a basket of foreign currencies, continued its slide after the U.S. tax reform bill was passed, while the rise in commodities, such as nonferrous metal and crude oil, fueled a rally in stocks in related sectors.

5 Trends to Watch in China's Sector Rotation:

  1. Demand on service level (hospitality, logistics, and food & beverage) providing increasing contributions to GDP
  2. Wealthy aging population leading healthcare and pharmaceutical consumption
  3. Environmental protection receiving more attention from policymakers
  4. Continuing adoption of technology innovation throughout everyday lives
  5. Supply side reform strengthening industrial productivity

VanEck Vectors® ChinaAMC CSI 300 ETF (PEK)
Constituent Returns by Sector - 2017

Chart of VanEck Vectors ChinaAMC CSI 300 ETF (PEK) Constituent Returns by Sector - 2017

Source: Factset. Data as of 12/31/2017. Performance data quoted represents past performance which is no guarantee of future results and which may be lower or higher than current performance. Investment returns and ETF share values will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. Performance current to the most recent month-end can be obtained at vaneck.com/pek.

Click here to view PEK's standardized performance.
 

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Where Was the 2018 January Effect? https://www.vaneck.com/blogs/muni-nation/where-was-2018-january-effect/ VanEck Blog 2/14/2018 12:00:00 AM

The "January effect" is based on the idea of a seasonal increase in asset prices in January, generally driven by supply-demand dynamics. This year it was nowhere in sight for the muni market. However, signs leading up to the start of the year had suggested the likelihood of a strong January effect, so we'll be watching to see how this plays out in the remainder of the year.

In 2017, January got off to a racing start but came to a screeching halt by mid-month. The end result was the weakest January since 2013, with over $31 billion of municipal bonds being issued during the month, 40.0% above the 10-year average for the month.1

And then December 2017 rolled around. As negotiations around the proposed new tax legislation continued, confusion and uncertainty reigned. What was going to happen with advanced refundings? What was going to happen with Private Activity Bonds2 (PABs)?

Issuance Boom in December

The result was issuance in the municipal market—really big issuance! At $62.5 billion, December 2017 beat the December 1985 record, and was 113% greater than the decade average.3 Heading into 2018, issuance looked like it had been absorbed, and there was word that, in anticipation of lean issuance in January, a number of players in the market had taken quantities of bonds onto their own books. (In the event, PABs were not repealed, but following the end of the year, issuers of tax-exempt debt no longer have the authority to advance refund bonds with tax exempt debt.)

January Municipal Bond Returns: 2000 - 2018

Chart of January Municipal Bond Returns: 2000 - 2018

Source: Morningstar. Based on the Bloomberg Barclays Municipal Bond Index. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. For illustrative purposes only.

As things turned out and despite various indications to the contrary (including anticipation for sparse 2018 supply), January 2018 performance was notably negative. Quite a rare outcome for municipal performance in the month of January. We feel lingering uncertainty about the impact of the new tax rules may have played a role, as market participants wait on the sidelines for more clarity.

From our perspective, munis and their tax-exempt status still sustain their appeal in spite of the corporate and individual tax rate changes (See "Munis Remain Attractive Despite Tax Changes). As the impact of the tax changes continue to become more concrete, potential opportunities will likely become clearer.

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Objectivity Amid Volatility https://www.vaneck.com/blogs/allocation/objectivity-amid-volatility/ The Fund’s asset class positioning changed this month with an increased allocation to stocks (now 87%) and a reduction in the bond allocation (9%).  

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VanEck Blog 2/13/2018 12:00:00 AM

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

January Performance Summary

The VanEck NDR Managed Allocation Fund (the "Fund") returned +3.68% versus +2.94% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) in January.

The Fund was overweight stocks in January. We held a 75% allocation to stocks and a 25% allocation to bonds. Being overweight stocks was the right decision as global stocks returned +5.64% and bonds returned -1.15%.

February 2018 Positioning: Increased Stock Overweight

The Fund's asset class positioning shifted towards more bullish in February. We increased our stock allocation in February from 75% to 87%, decreased our bond allocation from 25% to 9%, and increased our cash allocation from 0% to 4%. The increased equity allocation is based on the seasonality indicator changing from bearish to neutral and the stock/bond mean reversion indicator changing from bearish to neutral. Our regional equity allocation shifts included increased allocations to the U.S. and the Emerging Markets, and a reduced allocation to Europe ex. U.K. The U.S. equity allocation changes include larger allocations to large-cap, small-cap, growth, and value.

Asset Class Positioning vs. Neutral Allocation, February 2018

Fund allocation chart as of February 2018

Source: VanEck. Data as of February 2018.

January 2018 Performance Review

Global Balanced Positioning Relative to Neutral*

The Fund's asset class positioning was a strong contributor to performance. We held a 75% exposure to global stocks and a 25% exposure to bonds. This was the right decision as global stocks returned +5.64% and bonds returned -1.15%.

Global Regional Equity Positioning Relative to Neutral*

Our regional equity positioning outperformed. Our largest overweight positions were in the U.S. (+4.86%), Europe ex. U.K. (+6.56%), and Japan (+5.02%). We were underweight Canada (+0.81%) and Pacific ex. Japan (+3.64%), which both underperformed the global stock index.

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

The U.S. market cap and style positioning outperformed its neutral allocation. We were neutral small-cap stocks and overweight large-cap stocks. This positioning contributed to performance as large-cap stocks (Russell 1000 Index) returned +5.49% and small-cap stocks (Russell 2000 Index) returned +2.61%. We were overweight both growth and value stocks. Growth stocks (Russell 1000 Growth Index) posted impressive returns of +7.08% in January.

Total Returns (%) as of January 31, 2018
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
3.68 3.68 17.98 14.16
Class A: Maximum 5.75% load -2.28 -2.28 11.21 10.32
60% MSCI ACWI/
40% BbgBarc US Agg.
2.94 2.94 17.14 13.10
Morningstar Tactical Allocation
Category (average)1
2.84 2.84 14.58 11.88

Total Returns (%) as of December 31, 2017
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
0.79 15.15 15.15 12.44
Class A: Maximum 5.75% load -5.01 8.55 8.55 8.46
60% MSCI ACWI/
40% BbgBarc US Agg.
1.17 15.77 15.77 11.86
Morningstar Tactical Allocation
Category (average)1
0.95 12.61 12.61 10.49

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

Returns less than a year are not annualized.

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

Weight-of-the-Evidence

We typically wait until the end of the month to comment on market action, but this month we will break from tradition given the magnitude of the selloff that the market has been experiencing. The stock market has reacted violently to a surge in interest rates, fearing the effect that higher rates may have on the economy. The 10-year Treasury yield started the year at 2.46% and as of February 8 is yielding over 2.84%. The S&P 500 Index has retracted 10.15% from the high it reached on January 26. Global stocks are off -8.96% over the same period.

The chart below shows the frequency and average durations of drawdowns for the S&P 500 Index over the past 30 years. The takeaway is that drawdowns of 10% or less are not infrequent, are typically short in duration, and recovery is usually quick. The bad news is that they are virtually impossible to time. That is why we do not attempt to anticipate market drawdowns, rather we react to them. A continued decline in the markets will be quickly measured by our technical indicators and, thereafter, reflected in our positioning.

Duration and Drawdowns of S&P 500 Index Over Last 30 Years

Magnitude of Drawdown (%)
Lower Bound Uppper Bound
Number of
Drawdowns
Average Duration of
Drawdown (days)
Average Duration of
Recovery (days)
-5% -10% 27 36.4 37.1
-10% -15% 5 73.2 77.8
-15% -20% 2 66.0 103.5
-20% -25% 0 0.0 0.0
-25% -100% 2 642.5 1,297.5

Source: FactSet, VanEck. Data as of January 31, 2018. Past performance is no guarantee of future results. An index's performance is not illustrative of the Fund's performance. Indices are not securities in which investments can be made.

The next two charts are from Alejandra Grindal, Senior International Economist at Ned Davis Research. We think that both charts put this selloff into perspective. The largest market corrections have historically been associated with global economic slowdowns. Global slowdowns are the gray shaded area and the red circles are the drawdowns in global stocks.

Performance of MSCI ACWI (Local Currency) During OECD-Defined Slowdowns

Chart of Performance of MSCI ACWI (Local Currency) During OECD-Defined Slowdowns

Source: Ned Davis Research. Data as of February 6, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.
Copyright 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

This chart shows global Purchasing Managers' Index (PMI) data. It is a gauge of economic health by measuring the manufacturing sector. Right now, global growth is very strong. Almost all countries are in an expansionary stage. This is a bullish sign for stocks that makes a sustained drawdown unlikely.

Global Manufacturing PMIs (Heat Map)

Chart of Heat Map of Global Manufacturing PMIs

Source: Haver Analytics, Ned Davis Research. Data as of January 31, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.
Copyright 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

The primary argument against being bullish right now is high valuations. The current P/E on the S&P 500 Index is 20.81. We can see from the below chart that over the long term, which we define as 10-year periods, stocks with cheaper valuations tend to outperform stocks with more expensive valuations. This result confirms the general wisdom that, over the long-term, you want to buy assets at a discount.

S&P 500 Index Average 10-Year Annualized Return by P/E Ratio Ranking

Chart of S&P 500 Index Average 10-Year Annualized Return by P/E Ratio Ranking

Source: Bloomberg. S&P 500 Index P/E and performance data from 1/31/1981 to 1/31/2018. Price-to-Earnings (P/E) ratio is the price of a stock divided by its earnings per share.
Charts are for illustrative purposes only. Past performance does not reflect future results.

But a 10 year holding period is a very long time for most. To determine if valuations are useful in the near term we shortened our timeframe from ten years to one year. With the exceptions of the most expensive and cheapest valuation quintiles, the results are random. In fact, investors have historically been well compensated for investing at these valuation levels.

S&P 500 Index Average 1-Year Annualized Return by P/E Ratio Ranking

Chart of S&P 500 Index Average 1-Year Annualized Return by P/E Ratio Ranking

Source: Bloomberg. S&P 500 Index P/E and performance data from 1/31/1981 to 1/31/2018. Price-to-Earnings (P/E) ratio is the price of a stock divided by its earnings per share.
Charts are for illustrative purposes only. Past performance does not reflect future results.

At times like this, we believe it's important to remind clients to stay the course. The economy is currently growing at a healthy pace and this should limit the magnitude of any market corrections. Valuations are expensive and this is a risk. High valuations limit upside and give us more room to fall during market corrections. But valuations in isolation are generally not a good way to time market exposure.

Additional Resources

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With Market Mania, Sanity in Gold https://www.vaneck.com/blogs/gold-and-precious-metals/with-market-mania-sanity-in-gold/ The markets have entered the mania phase of this cycle which should lead investors to refocus their attention on gold’s role as a safe haven.

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VanEck Blog 2/9/2018 12:00:00 AM

Driven by U.S. Dollar Weakness, Gold Market Gained in January

The gold price continued to move higher after becoming oversold ahead of the December 13 Federal Reserve (the "Fed") rate announcement. After reaching a 17-month high of $1,366 per ounce on January 25, gold finished the month with a $42.10 (3.2%) gain at $1,345.15 per ounce. The move to new highs was driven by U.S. dollar weakness. The U.S. Dollar Index (DXY)1 sunk to lows last seen in 2014, due to currency comments and trade tariffs announced by the Trump administration, strong economic data from the Eurozone, and European Central Bank (ECB) minutes that suggested it might move sooner than expected to unwind its bond buying program. The last days of the month brought some weakness for gold as markets begin to see increasing chances of a Fed rate hike in March.

Gold Stocks Consolidated and Valuations Remain Attractive

Gold stocks seem to be consolidating after outperforming gold in December. The equities trailed gold bullion in January as the NYSE Arca Gold Miners Index (GDMNTR)2 advanced 2.0% and the MVIS Global Junior Gold Miners Index (MVGDXJTR)3 declined 1.6%. Many companies reported positive fourth quarter and year-end production results. Due to the muted reaction in their share prices, valuations continue to track below long-term averages. In the current environment, gold stocks are not receiving much attention as investors focus on the broader stock market, cryptocurrencies, and other commodities.

Rising Bond Rates, Full Employment, Global Growth Spur Inflation Expectations

A surge in interest rates was also supportive of gold in January, as 10-year U.S. Treasury rates advanced to their highest level in nearly four years. In 2017, rising bond rates proved to be a headwind for the gold price. However, since mid-December rates have risen in tandem with the gold price. We believe this is because the latest increase in rates has been driven by inflation expectations rather than activity from the Fed. It seems the market is beginning to view full employment, tax stimulus, and synchronized global growth as inflationary. Commodities have been trending higher. There is also growing potential for protectionist trade policies and purchasing managers globally are finding it increasingly hard to fill demand. There is a nationwide truck shortage in the U.S. and The Wall Street Journal reports strong wage growth in several metropolitan areas.

Structural Changes in Economy, Demographics Likely to Mute Inflation

While inflation could pick up, we do not believe it will reach levels that might drive gold. In fact, we believe there have been structural changes in the economy that mute the inflationary cycles that goods and services experienced in the past. Globalization, immigration, and technology have evolved to enable companies to produce as much as needed to meet demand. Bottlenecks do not last. Everything has become commoditized. Competition is intense. E-commerce drives retail. Low wage immigrants take unwanted jobs. Many companies are announcing one-time bonuses and other perks with the new tax cuts. At this time, we have not heard of any company announcing permanent wage increases. Contracting, outsourcing, and automation keep wage growth low. Demographics are also anti-inflationary as boomers move into harvest mode. For years the Fed has failed to raise inflation to its targeted 2% by flooding the economy with liquidity. That liquidity, instead of raising consumer price inflation in the real economy, has generated asset price inflation in the financial economy — stocks, bonds, real estate, cryptocurrencies, art, etc. Now the Fed is tightening. Gold or gold stocks are seen as a real economy inflation hedge, however we do not see it as a significant driver in 2018.

Late-Stage Economy Has Entered the Mania Phase

In our December commentary we talked about the risks of a downturn in a late-cycle economy, as well as the possibility of a market decline that morphs into a debt-driven financial crisis. We now believe the markets have entered the mania phase of this cycle. A series of experiments by Harvard and MIT grad students reported in The Wall Street Journal show that when rates are low, investors' appetite for risk increases beyond what seems logical. It is hard to characterize the price action of cryptocurrencies as anything but a mania. The High Tech Strategist newsletter quotes economic historian Charles Kindleberger: "At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without any understanding of the processes involved".

Across other markets the mania is broadly based. Goldman Sachs estimates that the prolonged bull market in stocks, bonds, and credit has left a measure of average valuation at the highest since 1900. The Dow Jones Industrial Average (DJIA)4 had the most new highs ever recorded in 2017 and saw its longest run without a 3% correction. The S&P 500 Index (SPX)5 has broken similar records. Margin debt on major stock exchanges tracked by the Financial Industry Regulatory Authority (FINRA) increased 21% in 2017. The Wall Street Journal found the outperformance of growth stocks in January was the most in such a short period aside from the last year of the dot-com bubble. Manias rarely end quietly. When they end, they typically crash. They can last for years and we speculate that the current mania might run its course into 2019. Former Chairman of the Federal Reserve Alan Greenspan famously recognized "irrational exuberance" in the markets three full years before the peak of the tech bubble in 2000.

As Mania Reaches Extremes, A Look at Gold's Performance Across Cycles

Gold is recognized as a hedge against financial stress and tends to outperform other investments in severe market downturns. In a June 2017 report, ETF Securities looked at gold's performance during drawdowns of over 15% in the S&P 500. Since 1982 there have been ten such S&P drawdowns that averaged -24.4%. The corresponding average performance of gold was +7.2%. A 2011 bulletin by Lombard Odier looked at gold real returns in major global banking crises since the Great Depression. They found five banking crises lasting from 12 to 57 months during which the real performance of gold averaged +20.6%.

Most people reading this report carry the Tech and Housing mania in their financial memory. In the table we broadly characterize the markets since 1995 as bull/manias, crashes, and recoveries to see how stocks and gold investments behaved in each. We examine the returns of the S&P 500, gold, the Philadelphia Stock Exchange Gold and Silver Index (XAU)6 and the actively managed VanEck International Investors Gold Fund (Class A - INIVX).

Performance in the Age of Central Bank Profligacy

From To S&P 500 Gold XAU INIVX
Tech Bull/Mania Jan-95 Mar-00 264.2% -23.3% -35.6% -61.3%
Tech Crash* Mar-00 Oct-02 -43.4% 11.1% 9.4% 59.8%
Recovery** Oct-02 Oct-07 104.7% 136.5% 205.0% 329.4%
Housing Crash*** Oct-07 Mar-09 -54.7% 25.4% -32.4% -29.3%
Recovery Mar-09 Sep-11 77.8% 97.6% 91.3% 154.3%
New Bull/Mania Sep-11 Jan-18 184.7% -27.3% -56.3% -56.0%

* peak to trough in the SPX
** trough to peak in the SPX
***SPX trough to peak in the Gold price

Source: Bloomberg, VanEck. Data as of January 31, 2018.

INIVX Expenses: Class A: Gross 1.35%; Net 1.35%. Expenses are capped contractually until 05/01/18 at 1.45% for Class A. Caps exclude certain expenses, such as interest.

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

Bull/Manias:

Gold investments do very poorly when the bulls are running at full speed. Investors generally feel no need for a safe haven7 in a market that rises relentlessly. However, gold and gold stocks are performing somewhat differently in the current mania. Substantial losses occurred in the cyclical bear market in gold from 2011 to 2015 when gold and the XAU declined 41.4% and 76.1% respectively, while the S&P 500 Index gained 98.4%. As the markets now reach their mania phase, there is no longer heavy selling pressure on gold and gold stocks. In fact, they have stabilized with nice gains in 2016 and 2017. Also, there are other factors such as the U.S. dollar, real rates, and geopolitical risks that have recently influenced the gold price.

Crashes:

Gold is the clear winner in a crash, fulfilling its role as a hedge against financial turmoil. The performance is mixed for gold stocks. Many gold stocks did very well in the Tech Crash, but suffered losses in the Housing Crash. We believe industry fundamentals were the reason for their poor showing. China was driving a commodities super-cycle in which costs rose relentlessly. Shortages in labor, equipment, and materials along with record energy prices drove double-digit cost inflation. Margins were squeezed and companies failed to meet market expectations. Performance was also compromised by poor management decisions. As a result, gold stocks suffered deratings in 2008 and 2011 when their value relative to gold diminished substantially. We believe gold industry fundamentals today are more like those around the time of the Tech Crash. Companies have regained efficiencies and are well managed, standing to fully benefit from any rise in the gold price.

Recoveries:

Both gold and gold stocks outperformed in the recoveries. Many gold stocks exhibit exceptional leverage to the gold price in the recovery phase. When companies are well managed and costs stay contained, they bring earnings and resource leverage. In addition, there is a scarcity component. Capitalized at roughly $260 billion, according to VanEck research, the global gold industry is relatively small. When investors decide they need a safe haven, there may not be enough gold stocks to go around.

Download Commentary PDF with Fund specific information and performance

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Moats Open 2018 in Strong Position https://www.vaneck.com/blogs/moat-investing/moats-2018-strong-position/ International and U.S. moats both started strong in 2018, ending ahead of their respective broad market indices in January.

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VanEck Blog 2/8/2018 12:00:00 AM

For the Month Ending January 31, 2018

Performance Overview

International and U.S. moats started 2018 on a strong note, continuing progress from last year. International moats, as represented by the Morningstar® Global ex-US Moat Focus IndexSM (MGEUMFUN, or "International Moat Index"), led the MSCI All Country World Index ex-USA in January (5.91% vs. 5.57%, respectively). The U.S.-oriented Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") outperformed the broad U.S. markets as represented by the S&P 500® Index (6.17% vs. 5.73%, respectively).

International Moats: New Name, Big Impact

GKN Plc (GKN LN, +39.15%), a narrow moat rated firm in the U.K. that supplies automotive and aircraft manufacturers, was the standout constituent for the month after being added to the International Moat Index in December. A hostile takeover bid for GKN by Melrose Industries Plc in January helped push its shares higher. China was by far the top contributing country to returns, with Bank of China Ltd. (3988 HK, +22.59%) leading the pack in the strong performing financial sector within the International Moat Index. Switzerland and Canada were the only countries to detract, although China-based gas utility, China Resources Gas Group Ltd. (1193 HK, -9.22%), was the worst performing constituent in the Index. Canadian energy company Enbridge Inc. (ENB CN, -6.45%) also struggled under price pressure driven primarily by investor concerns over its ability to maintain its attractive dividend in the face of growth obstacles.

U.S. Domestic Moats: Amazing Amazon

Amazon was the top performing constituent in the U.S. Moat Index for January, and its quarterly results triggered an upward fair value revision from $1,250 per share to $1,600 by Morningstar equity analysts at the beginning of February. Meanwhile, Amazon, Berkshire Hathaway, and J.P. Morgan sent shockwaves through the healthcare sector, which has had a large weight in the Index for several quarters, when they announced their joint healthcare effort at the end of the month. Despite the announcement, healthcare was the strongest contributor to U.S. Moat Index returns in January. No single sector detracted from returns for the period, but a few companies did struggle, such as L Brands Inc. (LB US, -16.82%). The retailer has seen its share price whipsaw over the past year, but Morningstar has maintained its wide moat rating and current $69 fair value estimate.

 

(%) Month Ending 1/31/18

Domestic Equity Markets

International Equity Markets

(%) As of 1/31/18

Domestic Equity Markets

International Equity Markets

(%) Month Ending 1/31/18

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Total Return
Amazon.com Inc 24.06
Cardinal Health Inc 18.05
Gilead Sciences Inc 16.97
TransDigm Group Inc 15.40
Veeva Systems Inc Class A 13.71

Bottom 5 Index Performers
Constituent Total Return
L Brands Inc -16.82
Polaris Industries Inc -8.86
General Electric Co -7.34
John Wiley & Sons Inc Class A -3.57
Eli Lilly and Co -3.56

View MOAT's current constituents
View MWMZX's current constituents

Morningstar
Global ex-US Moat Focus Index (MGEUMFUN)

Top 5 Index Performers
Constituent Total Return
GKN PLC 39.15
Bank Of China Ltd H 22.59
Industrial And Commercial
Bank Of China Ltd H
17.58
SINA Corp 16.89
Elekta AB B 15.76

Bottom 5 Index Performers
Constituent Total Return
China Resources Gas Group Ltd -9.22
Enbridge Inc -6.45
Samsonite International SA -5.62
TransCanada Corp -5.47
Roche Holding AG Dividend Right Cert. -2.42

View MOTI's current constituents

As of 12/15/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Index Additions
Added Constituent Ticker
Cardinal Health Inc CAH US
Veeva Systems Inc A VEEV US
Merck & Co Inc MRK US
Western Union Co WU US
Microchip Technology Inc MCHP US
NIKE Inc NKE US

Index Deletions
Deleted Constituent Ticker
Berkshire Hathaway BRK/B US
BlackRock Inc BLK US
CH Robinson Worldwide Inc CHRW US
Patterson Cos Inc PDCO US
Polaris Inds Inc PII US
T Rowe Price Group Inc TROW 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
Telecom Italia SpA Italy
Lloyds Banking Group Plc United Kingdom
SoftBank Group Corp Japan
Beijing Enterprises Holdings Ltd. China
Millicom Intl Cellular S.A. - SDR Sweden
Bank of China Ltd H Shares China
Nordea AB Sweden
Gas Natural SDG SA Spain
Bayer AG Germany
Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
Smiths Group United Kingdom
GKN United Kingdom
Swedbank AB Sweden
TransCanada Corp Canada
KDDI Corp Japan
GEA AG Germany
Danske Bank A/S Denmark
Samsonite International SA Hong Kong
Contact Energy Ltd New Zealand
Vodafone Group United Kingdom
Siemens AG Germany
Grupo Aeroportuario del Pacifico, S.A.B. de C.V. Mexico
Infosys Ltd India

Index Deletions
Deleted Constituent Country
Cemex SA CPO Mexico
Symrise AG Germany
HeidelbergCement AG Germany
China Telecom Corporation Ltd. - H Shares China
ENN Energy Holdings Ltd China
Nippon Tel & Tel Corp Japan
Nidec Corp Japan
Murata Manufacturing Co Ltd Japan
Telefonica Brasil S.A. - Prf Brazil
GlaxoSmithKline United Kingdom
Ansell Ltd Australia
CSL Ltd Australia
QBE Insurance Group Ltd Australia
Novartis AG Switzerland
Julius Baer Group Switzerland
Elekta B Switzerland
Danone France
Safran SA France
Bureau Veritas SA France
Tata Motors Ltd India
DBS Group Holdings Singapore
CapitalLand Commercial Trust Singapore

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



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Munis Remain Attractive Despite Tax Changes https://www.vaneck.com/blogs/muni-nation/munis-attractive-despite-tax-changes/ Despite the changes in both corporate and individual tax rates, municipal bonds are still attractive

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VanEck Blog 2/6/2018 12:00:00 AM

Despite passage of the Tax Cuts and Jobs Act at the end of last year, municipal bonds can still be an attractive investment and reliable source of tax-free income.

Over the last seven years or so we have seen significant increases in the holdings of municipal bonds by both banks and insurance companies.1 Within the insurance industry itself, while bond purchases by property and casualty ("P&C") companies have diminished, those by life insurers have increased. Although, with a reduction in the corporate tax rate to 21%, we may now see some reduction in demand from banks, whether the same holds true for life insurance companies remains to be seen.

When it comes to individual investors, however, the picture in the crystal ball becomes murkier. One thing that hasn’t changed, though, is the nature of municipal bonds themselves and the attractiveness of their tax-exempt status. So, for those investors who live in states with high state and local taxes, perhaps there is, now, even more reason to look to munis to help mitigate their tax bills.

If history is anything to go by, tax reforms that have lowered personal taxes have led to no less interest in muni funds on the part of investors. Following the Tax Reform Act of 1986, signed into law by President Reagan on October 22 that year, investment in muni bonds by individuals did anything but fall.

Change in Holders of Muni Bonds 4Q 1986 – 4Q 1987

Chart of Change in Holders of Muni Bonds 4Q 1986 – 4Q 1987

Source: Federal Reserve Z1 Report. MMF=Money Market Funds. For illustrative purposes only.

Back then, of course, there were no muni ETFs. Now there are. While it remains to be seen, therefore, just what effect on inflows and outflows the latest tax reforms will have, the nature of neither munis nor muni ETFs have changed. The former still provide attractive tax-free income, and the latter provide diversification, trading flexibility, daily transparency, lower costs, and tax efficiency.

Post Disclosure  

1 Bloomberg Briefs: Daily Brief: Muni, January 9, 2018

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Green Bond Market Looks to Go From Billions to Trillions https://www.vaneck.com/blogs/etfs/green-bond-market-look-billion-trillion/ ]]> VanEck Blog 2/5/2018 12:00:00 AM

Green bond issuance in 2017 shattered the record from 2016, with both new and repeat issuers helping to satisfy the increasing demand for sustainable bond investments. Approximately $155 billion was issued by 242 issuers, including 156 first time green bond issuers. Total issuance was 84% higher than in 2016, an illustration of the spectacular growth that the market continues to experience.1

New issuers bring diversity

As the market’s size continues to increase, so does its diversity. The top three issuers were not only first time issuers, but also allowed investors to gain new types of exposure. Fannie Mae rocketed to the top of the issuance league tables with $24.9 billion of green asset-backed securities (ABS), backed by loans that finance either green multi-family housing, or energy, or water efficiency improvements. Although not new to the green bond market, Fannie Mae’s enhanced reporting and transparency allowed it to obtain the green designation from the Climate Bond Initiative2 in 2017. It should be noted, however, that although this designation makes the bonds eligible for inclusion in the S&P Green Bond Select Index, issuance was spread over more than 1,000 individual issues, none of which met the Index’s rigorous criteria on tradability and liquidity due to their issue size. Nevertheless, the growth of recognized green ABS issuance represents an important development and is an example of the opportunities that the securitization market can provide in addressing climate goals.

France was the second largest issuer in 2017 with its benchmark sovereign green bond issuance. Although not the first ever sovereign green bond, it was by far the largest with over $10 billion issued in total, and helped pave the way for Fiji and Nigeria to come to market with sovereign green bonds later in the year. China Development Bank rounded out the top three issuers, with over $4.6 billion issued, including approximately $1.7 billion in EUR- and USD-denominated global issues. These bonds were “Certified Climate Bonds” and, therefore, satisfy rigorous pre- and post-issuance standards, and allow global investors to finance environmentally friendly “Belt and Road”3 projects related to energy, transportation, and water management.

Despite the massive ABS issuance from Fannie Mae and a growing sovereign presence, non-financial corporates were the largest category of issuance in 2017. The largest corporate issue came from Mexico City Airport Trust, which issued $4 billion of secured green bonds to finance the city’s new international airport. The majority of corporate green bonds came from European issuers, with Apple rounding out the top 10 with a second green bond issuance that followed its landmark 2016 bond.

The U.S. was the top country with $43 billion of green bond issuance, driven by Fannie Mae and municipal issuance. Corporate issuance in the U.S., however, continues to lag non-U.S. corporates. China and France were second and third highest in terms of issuer country, each with approximately $22 billion. Overall, Europe continues to dominate issuance, but the presence of an increasing number of emerging markets issuers may be a positive sign, given their need for green infrastructure.

Bonds that finance projects focused on improving efficiency grew from 21% of the overall market in 2016 to 29% in 2017. However, energy-related projects (e.g., solar and wind projects) remained the most common from a use of proceeds perspective, with a 33% share of total issuance. Waste management and projects related to climate change adaptation accounted for 15% and 13% of total issuance, respectively.

Once again, the amount of issuance carrying some type of independent verification increased, demonstrating the increasing importance that investors place on receiving some type of third-party review. 75% of total issuance in 2017 carried an independent review, versus an average of about 56% over the prior five years.

Green Bond Issuance

Green Bond Issuance (2018 Estimated)  

Source: Climate Bonds Initiative. Not intended to be a forecast of future events, a guarantee of future results, or investment advice.  

2018 Outlook

Issuance estimates for 2018 point to further growth. The Climate Bonds Initiative’s official estimate is for $250-300 billion of new green bonds. We expect the market to continue to diversify, and for a few key themes to emerge this year:

 

  1. Progress towards harmonized standards: Although it is unclear whether there will ever be, or needs to be, a single global standard for green bonds, progress is already being made to harmonize some of the local green bond standards and frameworks that exist. We believe that getting closer to a common standard could serve as a catalyst for further market growth.
  2. Better reporting: With the use of proceeds concept firmly established and generally accepted taxonomies in place, such as the one developed by the Climate Bonds Initiative, we believe investors will increasingly focus on the ongoing reporting by green bond issuers. Although the majority of issuers already provide some type of reporting, focus will likely shift to enhancing the level of information and providing standardized metrics. The 2017 updates to the Green Bond Principles4 (which were instrumental in catalyzing growth in the market when first created in 2014), puts increased emphasis on reporting metrics. We believe that better reporting will become commonplace, and perhaps even required, in the not too distant future.
  3. Using green bonds within SDG portfolios: The Sustainable Development Goals (SDGs) are 17 internationally agreed upon goals that seek, among other things, to protect the planet in an equitable way while maintaining and increasing prosperity. Institutional investors are increasingly constructing and evaluating portfolios through the lens of the SDGs by allocating capital towards investments which help to achieve these outcomes. Because of their positive impact, and the transparency provided through extensive disclosure, green bonds can be well suited for integration within SDG portfolios. We expect greater recognition and utilization of the SDGs by investors to promote growth of the green bond market.

Billions to trillions

Green bond market growth shows no signs of slowing following last year’s record issuance. In fact, out of all possible bond types, heads of debt capital markets at 20 of the top investment banks are most optimistic about green bond volume.5 However, at just ten years old, the market is still in its infancy and must grow dramatically in order to go from billions to trillions of U.S. dollars outstanding. Greater education is needed to bring into the fold fixed income investors who are not explicitly integrating ESG factors into their mandates. Increased demand will in turn encourage issuers who have so far stayed on the sidelines (with U.S. corporates the most glaring example) to jump in. With the ambitious goals of the Paris Agreement6 and the increasing awareness of the risks that climate change generally pose to sustainable development and within investor portfolios, we believe that issuers, investors, and policymakers all have a vested interest in growing the green bond market.

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Infrastructure – A New Beginning? https://www.vaneck.com/blogs/muni-nation/infrastructure-a-new-beginning/ The need for infrastructure overhaul in the U.S. is huge: How is it going to be funded?

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VanEck Blog 2/1/2018 12:00:00 AM

The Problem

$4.59 trillion!1 According to the American Society of Civil Engineers, this is the need for infrastructure spending in the U.S. over the next 10 years.2 Of this, President Trump, in his State of The Union speech, called for authorization of only $1.5 trillion3 to be currently funded, leaving us shy by some $3 trillion to meet the estimated needs.

Infrastructure Needs ($ Billion)

Infrastructure Total Need
Surface Transportation 2,042
Water/Wastewater 150
Electricity 934
Airports 157
Waterways & Ports 37
Dams 45
Hazardous & Solid Waste 7
Levees 80
Parks 114
Rail 154
Schools 870

Source: Barclays, American Society of Civil Engineers - 2017 Infrastructure Report Card. For illustrative purposes only.

From Where is the Money Going to Come?

While infrastructure overhaul was a campaign pillar for President Trump, we are one year in and have yet to receive details (officially) of any plans to address this from the White House. In particular, how do they expect to fund such a program? Likely, municipal bonds will play a role in any financing. But should plans materialize, it seems highly unlikely that, in the current political environment and in an election year, taxpayers are going to be asked to ante up.

Were munis to play a future financing role, then Private Activity Bonds4 (PABs) would appear to be eminently suitable. They have already proved both their worth and effectiveness in this context. However, while PABs may have survived the chop in last year's Tax Cuts and Jobs Act, the rules around them and specifically those governing what they can be used to finance were not changed either. Among other things, the definitions of public-purpose infrastructure categories remain narrow, state and transportation volume caps remain in place – as does Alternative Minimum Tax (AMT), and advance refundings are still prohibited.

"The Times They Are a-Changin'" – Possibly

Perhaps the recently leaked document "purported to be the outline of the administration's long-awaited infrastructure proposal"5 does address these issues (and others), however it would be less than wise to lose sight of the enormity of the current numbers. Annual PAB supply over the past few years has been less than $20 billion,6 a level well under current caps. Based on the figures reported above, the unmet needs for infrastructure investment still remain in the trillions of U.S. dollars: mouse and elephant!

As for the real size of the elephant, who knows whether $4.59 trillion is truly enough? I'm minded that it may not be. So once again, we shall just have to wait and see.

Post Disclosure  

1Reuters: U.S. infrastructure gets D-plus grade in civil engineers' report card, again, https://www.reuters.com/article/us-usa-infrastructure-reportcard/u-s-infrastructure-gets-d-plus-grade-in-civil-engineers-report-card-again-idUSKBN16G21I

2Barclays: Municipal & Public Policy Research, Infrastructure Plan – a Long Road with Some Potholes

3Reuters: Trump urges Congress to help stimulate $1.5 trillion in infrastructure spending, https://www.reuters.com/article/us-usa-trump-infrastructure/trump-urges-congress-to-help-stimulate-1-5-trillion-in-infrastructure-spending-idUSKBN1FK0C7

4Investopedia – Private Activity Bonds (PABs): "Tax-exempt bonds issued by or on behalf of local or state government for the purpose of providing special financing benefits for qualified projects. The financing is most often for projects of a private user, and the government generally does not pledge its credit."

5Competitive Enterprise Institute: #SOTU2018: All Eyes on Infrastructure, https://cei.org/blog/sotu2018-all-eyes-infrastructure (Accessed January 26, 2018)

6Barclays: Municipal & Public Policy Research, Infrastructure Plan – a Long Road with Some Potholes

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A Bond Strategy for All Seasons https://www.vaneck.com/blogs/etfs/fallen-angels-bond-strategy-all-seasons/ Fallen angels outperformed the broad high yield bond market in 2017 and closed the year surpassing BB- and B-rated bonds, while keeping pace with CCC-rated bonds. 

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VanEck Blog 1/30/2018 12:00:00 AM

Fallen angels outperformed the broad high yield bond market1 by 2.9% in 2017 (10.4% vs. 7.5%) and closed 2017 surpassing BBs2 and single-Bs, while keeping pace with CCCs. Some of the factors affecting 2017 credit markets positively were deregulation, the anticipation and passage of tax reform, oil price stabilization, and generally positive market sentiment. The chart below helps illustrate how fallen angels navigated last year compared with other high yield indices across the credit spectrum.

Fallen Angels Offered Limited Downside with Healthy Participation in 2017
As of December 31, 2017

Year to Date 2017 vs. 2016 Rising Stars and Fallen Angels Chart

Source: FactSet. 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 disclosures below.

Fallen angels' distinct characteristics stem from their path to high yield credit status, typically accompanied by portfolio selling, which has generally resulted in value, quality, and opportunity once they are in the high yield universe. As originally issued investment grade bonds, fallen angels tend to selloff prior to their downgrades to high yield, often allowing for the purchase of these stressed bonds at meaningful discounts. Also, the majority of fallen angels have tended to remain at the highest end of the high yield credit spectrum – currently, approximately 75% of fallen angels carry BB ratings. Finally, credit markets have tended to deteriorate at the sector level, which has led to sector biases among fallen angels that could be beneficial in the event of a sector recovery. This scenario most recently played out with the 2016 commodities recovery, which occurred after a significant volume of energy and basic industry (i.e., metals and mining) sector fallen angels had entered the Fallen Angel Index. For 2017, fallen angel outperformance was mainly driven by overweights in the basic industry, telecom, and banking sectors, as well as specific issuers within those sectors.

Positive overall high yield performance in 2017 came as the 5-year U.S. Treasury yield topped 2.2%, which is a level not seen since 2011. Most of this rate rise occurred in the last quarter of 2017 (+30 basis points). While fallen angels have averaged higher interest rate duration3 versus the broad high yield bond market, fallen angels outperformed by 0.5% in the fourth quarter (0.9% vs. 0.4%), driven mainly by sector overweights in basic industry and banking.

Outlook

It has been a while since fiscal policy has accompanied monetary policy with so much significance, and 2018 is starting with record equity market highs, multi-year interest rate highs, and multi-year credit spread lows. A slow and gradual U.S. Federal Reserve (Fed) policy path would be better for fallen angels and broad high yield. The Fed ended its quantitative easing program late last year and three to four interest rate hikes are projected for this one. Historically, however, fallen angels' higher average credit quality, sector differentiation, and value proposition have helped offset some of the impact of rising interest rates. Although credit spreads are at multi-year lows, they have also tended to narrow during periods of interest rate hikes. Deregulation and tax reform could further support high yield credit markets, but some of the tax reform may not be as helpful to lower-rated high yield companies, given new limits on how much interest issuers may deduct.

Fallen angels' largest sector overweights versus the broad high yield bond market are in basic industry (materials) and energy; and as such, will have greater sensitivity to commodity price movements. Stable oil prices tend to be supportive of high yield, in general. Should markets overheat or otherwise deteriorate, though, fallen angels present a higher quality option for high yield investors that may better help absorb related market volatility. Lower rated high yield bonds have tended to deteriorate more than higher rated high yield bonds when credit spreads widened significantly. In addition, a declining credit market could precipitate new fallen angel entrants, which could present new value opportunities for this strategy.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) Consistently Outperformed Peers4
Performance Relative to Peer Group

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

Source: Morningstar. Data as of December 31, 2017.
Click here for standardized performance current to the most recent month end.
This chart is for illustrative purposes only. The performance data quoted represents past performance. Past performance is not a guarantee of future results. Performance information for the Fund reflects temporary waivers of expenses and/or fees. Had the Fund incurred all expenses, investment returns would have been reduced. Investment return and value of the shares of the Fund will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. Fund returns reflect dividends and capital gains distributions. Performance current to the most recent month end is available by calling 800.826.2333 or on vaneck.com. VanEck Vectors Fallen Angel High Yield Bond ETF commenced on April 10, 2012. An investor cannot invest directly in an index. The results assume that no cash was added to or assets withdrawn from the Index. The high yield bond peers category is represented by the Morningstar Open End Funds – U.S. – High Yield Bond category. See index descriptions below.

VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) received a three-year and overall five-star rating from Morningstar, as of December 31, 2017.5 ANGL was rated against 609 funds in Morningstar's high yield bond category based on total returns. Past performance is no guarantee of future results.

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China Bond Appeal Grows with Possible Index Inclusion https://www.vaneck.com/blogs/emerging-markets-bonds/china-bond-possible-index-inclusion/ With higher yields, ongoing reforms, and index inclusion on the horizon, investors may begin to find opportunities in China’s onshore bond market.

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VanEck Blog 1/29/2018 12:00:00 AM

International bond investors will soon need to consider a greater role for Chinese debt in their portfolios as the country's bonds are likely to enter emerging markets and global bond indices in the near to medium term. While the sheer size of the market and the well-advertised degree of leverage in the Chinese economy have led to concerns, the market and the Chinese government, have begun to behave in a more market-oriented fashion. And as yields and spreads adjust higher, investors may begin to see opportunities in the world's third largest domestic debt market.

In fact, last year, a stronger yuan (even if boosted in part by restrictions on capital outflows) and higher yields helped attract foreign capital to the onshore market. Total offshore holdings in the interbank market reached 1.15 trillion yuan (US$177 billion) by yearend.1 Government yields rose even as the People's Bank of China expanded liquidity in 2017, and credit spreads also moved wider.

Chinese Corporate Bond 5-Year Spreads by Rating

Chart of Chinese Corporate Bond 5-Year Spreads by Rating

Source: Bloomberg. Data as of 12/29/17. Spread represents the difference between the ChinaBond Corporate Bond Yield Curve (AAA) 5Y or ChinaBond Corporate Bond Yield Curve (AA) 5Y and the ChinaBond Government Bond Yield Curve 5Y.2 Past performance is not indicative of future results. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

Wider spread levels represent a cheapening of asset prices as deleveraging continues, particularly in less efficient sectors dominated by state-owned enterprises ("SOEs"). Although these conditions – tightening of credit and possibly higher default rates – present a difficult environment for investors in the near term, they also represent the continuation of much needed market reform. The recent, although isolated, example of Dongbei Special Steel Group Co. Ltd, a state-owned steel producer that went bankrupt in 2016, provides a good example of the central government's increasingly differentiated support for SOEs. Holders of its defaulted bonds agreed to a deep discount to par with an option to swap the restructured debt to equity. In addition, private capital was accessed from a strategic investor, who took a controlling stake in the company.

Market-based solutions to inefficiency, excess capacity and excess leverage, as well as an improved pricing mechanism that better reflects risk, should ultimately provide confidence to foreign investors, who continue to have very low exposure in the domestic market. For China to assert a more permanent position in international bond portfolios will require additional confidence that recent policies to open up the market will not be reversed in times of market stress. One result of convincing the market of the permanence of reforms will be the inclusion of onshore bonds in global fixed income benchmarks, likely leading to significant inflows into the domestic market.

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Global Names Drive Generics Returns https://www.vaneck.com/blogs/etfs/global-names-drive-generics-returns/ Generic drug company returns benefitted from both U.S. and international exposure in 2017, with Europe emerging as a bright growth spot in the generic drugs sector.

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VanEck Blog 1/26/2018 12:00:00 AM

On the first trading day of 2018, the U.S. Food & Drug Administration (FDA) announced new steps to streamline the generic drug approval process in the United States. While this is potentially significant, it's notable that non-U.S. market opportunities for many generic drug companies have driven recent performance. The largest contributors to generic company stock returns have come from global names tapping global market opportunities. As of January 23, 2018, the Indxx Global Generics & New Pharma Index is up +6.7%, adding to a quiet rally in 2017 of +17.4%.

Rapidly advancing biotechnological improvements and global synergies are boosting the returns of this health subsector.

VanEck Vectors Generic Drugs ETF (GNRX) Top Contributors by Country
December 31, 2016 – December 31, 2017

Chart of VanEck Vectors Generic Drugs ETF (GNRX) Top Contributors by Country

Source: FactSet.
Click here for standardized performance as of the most recent calendar quarter.
This chart is for illustrative purposes only. Historical information is not indicative of future results; current data may differ from data quoted. The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the ETF incurred all expenses and fees, investment returns would have been reduced. Investment returns and ETF share values will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. ETF returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV.
 

Europe: a bright spot for biosimilars and generics

A biosimilar is a drug which is an almost identical copy of an original product manufactured by a different company. Biosimilars are much more complex than traditional generic drugs, as the biosimilar company must synthesize a completely new drug without access to the original's specific recipe. The biosimilar company tries to recreate a drug and its effects without knowing the secret formula of the original manufacturer. Their complexity also allows the drug to be priced higher than traditional generic drugs, albeit still cheaper than the brand name original. The first biosimilar was approved by the FDA in the United States in 2015, making this is a relatively new biotech development, but impediments still exist to interchangeability in the U.S. Europe, on the other hand, has been an early adopter of biosimilars, with the first biosimilar approved for use in 2006.

The European market has emerged as a bright spot of opportunity in the generic drugs space. Foreign companies are pushing to expand further into this market, as seen by a number of key acquisitions and takeovers which occurred in 2017.

Celltrion (South Korea) is a pharmaceutical company that specializes in the production of biosimilar drugs. Celltrion has taken market share away from original drugs in Europe. Biosimilar Truxima, which competes with Roche's Rituxan, has taken away roughly 7% of the original drug's market share. Rituxan generated $7.5b in global sales in 2016, meaning that a few percentage points of market share went a long way towards revenue production. Truxima is available in all major European markets. According to FactSet data, Celltrion was up +136% in 2017.1

Shanghai Fosun (China) is a generic drug manufacturer based in China. In 2017, Shanghai Fosun initiated expansion into Europe through the acquisition of Tridem Pharma, a French company that specializes in drug distribution in African countries. According to FactSet data, Shanghai Fosun was up +112% in 2017.2

STADA Arzneimittel AG (Germany) is a pharmaceutical company that specializes in the production of generic and over-the-counter drugs. In 2017, U.S. firms Bain Capital and Cinven successfully bought out the company for $6.2b. This takeover orchestrated by two U.S. firms again highlights the growth potential that international investors see in the European generic drug market. According to FactSet data, STADA was up +106% in 2017.3

Generic drugs is a global business

We expect generic drug companies to continue pushing the envelope with new biotechnology and a global approach. The FDA's announcement could open the door for more opportunities in the U.S. for generic drug companies, but downward pricing pressure for generic drugs could also occur as more entrants crowd the marketplace in a relaxing regulatory environment. However, the global nature of the generic and biosimilar drug sector may allow these companies to grow as domestic and international economies continue to become more integrated. We believe that VanEck Vectors® Generic Drugs ETF (GNRX) is an attractive way to gain exposure to this growing global health subsector.

Click here for current GNRX holdings.

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Many Reasons To Be Cheerful About 2018 https://www.vaneck.com/blogs/emerging-markets-equity/reasons-to-be-cheerful-2018/ VanEck Blog 1/24/2018 12:00:00 AM

Continuing Strong Performance in 4Q'17

During the quarter, VanEck's emerging markets equity strategy returned 8.26% (measured by VanEck Emerging Markets Fund, Class A (GBFAX), excluding sales charge). On a relative basis, the Fund outperformed its benchmark, the MSCI Emerging Markets Investable Market Index (MSCI EM IMI)1, which gained 7.74% in the fourth quarter of 2017.

We are pleased to report that 2017 was a banner year for both the emerging markets and Fund investors. The Fund rose 49.70% during the year, outperforming the MSCI EM IMI which rose 37.28%. Gains were driven by improved corporate earnings and a supportive macro environment both globally and in emerging markets. After multiple years of underwhelming results for emerging markets companies, the asset class regained its gloss and was able to outperform its developed markets counterparts for the second year in a row. Growth outperformed value in 2017, reversing the underperformance from the previous year. Small caps, on the other hand, failed to outperform large caps for the second year in a row. We are excited about the prospect for 2018 as we believe we are in the midst of a multi-year earnings up-cycle coupled with a conducive macro environment and reasonable valuations.

As for the fourth quarter of 2017, there were some signs of "digestion" of the large gains in some of the biggest companies in emerging markets such as Alibaba Group Holding Limited, Tencent Holdings Limited, etc. There was some profit taking towards the end of the year. So while these companies did very well over the first three quarters, they had a more mixed performance in the fourth quarter.

Although we see China slowing a bit and addressing the excesses in its financial system, tightening seemed to level off during the quarter with the strong bits of the country continuing to be strong. In Brazil, social security reform appears to have been pushed back, but not necessarily shelved. This is causing a bit of a hiatus in that market's performance. In South Africa, it was all about the African National Congress (ANC) election. Cyril Ramaphosa won and we think this could be an encouraging sign. On the other hand, the Steinhoff debacle2 does constitute a blot on an otherwise clean landscape in terms of the management capability displayed by the country's leading companies.

South Africa was the best performing country in emerging markets for the quarter, along with Greece and India. India was able to salvage some performance in the last quarter of the year, after an extended period of underperformance in 2017 due to high valuations and elevated financial risk in the country. On the negative side, Pakistan and the United Arab Emirates suffered. On a sector level, healthcare rebounded after a shaky first three quarters and performed best during the fourth quarter. Utilities and telecommunication services, conversely, lagged in the quarter.

Emerging Markets Equity Strategy Review and Positioning

Growth and small-caps outperformed value and large-caps, helping the Fund's relative performance versus the MSCI EM IMI. Stock selection in the financials, information technology, and consumer staples sectors also helped relative performance, while stock selection in the healthcare sector dragged on relative performance. On a country level, the Fund's largest overweight, China, contributed most to its outperformance in the final quarter of the year. China continues to be one of the most exciting places for long-term structural growth opportunities. Taiwan and Russia also helped. On the negative side, South Korea and India detracted from relative performance in the fourth quarter.

Top Performers/Detractors

The top performing stock was Chinese company Tencent, which further strengthened its operations during the quarter. The top five included another two Chinese companies: Ping An Insurance (Group) Company of China, Ltd. ("Ping An") and China Lodging Group, Ltd. ("China Lodging") In addition to executing and beating earnings expectations, Ping An also benefited from giving greater transparency into its fintech business and improving its corporate communications. China Lodging benefited from a successful capex program, including acquisitions, which saw its operating leverage "kicking in". South Africa-based Naspers Limited not only continued to benefit from its substantial holding in Tencent, but also engaged in corporate activity to realize value. South Korean electronics manufacturer Samsung Electronics Co., Ltd. continued to benefit from the supply in its industry becoming more concentrated, while the uses become more broad-based and significantly reduce cyclicality.

The five greatest detractors from performance during the quarter were from around the globe. While still executing well, Chinese company, TAL Education Group gave up some of its extraordinary gains from earlier in the year. Brazilian car rental company Movida Participações SA continued to suffer both from unexpectedly high losses in its operations due to damaged and stolen cars and slower than expected improvement in its car resale business. Taiwanese company Basso Industry Corp., a leading manufacturer of pneumatic tools, experienced slower than expected sales recovery due to U.S. dollar depreciation. Another Brazilian company Biotoscana Investments S.A., which develops, manufactures, and distributes pharmaceutical products, suffered as a result of both changes in management and a slowdown in its Brazilian business. As a consequence of the country's challenging economic environment, Colombian bank Banco Davivienda S.A. experienced both a deterioration in the quality of its loan book and disappointing growth.

Outlook

Looking back over the year, there has definitely been enhanced interest in the emerging markets equities asset class. Since the asset class has underperformed for a number of years, positioning in it remains still relatively light. Previously there were better and less risky alternatives offering better returns. We believe that now the pendulum has swung the other way and returns appear to overwhelm any perception there may be of enhanced risk. However, while there may be less risk, certain countries are still struggling and there continue to be issues with others.

The big one remains China. People are now much more relaxed about the country. We see neither the capital outflows nor the pressure on the renminbi, which everyone has been concerned about. While debt is still increasing, it is doing so at a much slower pace and the government has demonstrated that it is addressing the issues, particularly the excesses (generally in the financial system). While the move towards better quality growth has not yet really impacted the overall level of growth (it is going to take a long time before it becomes apparent), the quality of the financial system is gradually improving.

Although Russia may not be a "happy hunting ground" for us in terms of what we can buy there, we appreciate the work that it has done in terms of inflation control and orthodox monetary policy. We have a holding in Sberbank of Russia OJSC. In general, the company consistently generates great returns on equity and benefits not only from the prevailing fiscal orthodoxy, but also the continued pruning of the banking system. Since the governorship of the Russian Central Bank was taken over by Elvira Nabiullina in 2013, more than 340 banks have lost their licenses. Sberbank continues to thrive and has many new avenues of opportunity, including mortgage lending and asset management.

In India, the government recently announced a substantial recapitalization of banks which it is hoped will provide the motivation for them to resolve the issue of their bad debts. Concerns remain, however, not only about how long this is going to take, but also whether it will then provide enough capital for growth in the banks thereafter. Our judgment is that it will not. We believe that, across the system, there are going to be hidden exposures to which the banks have not confessed, with public-sector banks being particularly affected, and that things are going to get a little worse before they get better. In our opinion, this all bodes well for private-sector banks and especially the best credit quality banks (for example, HDFC Bank Limited, which we hold) at the least risky end of the banking spectrum. They will be able to continue with their structural growth and taking of market share.

Mexico faces presidential elections in 2018 and many people are still trying to figure out just who is who and what is happening. While Andrés Manuel López Obrador, known as AMLO, remained in the lead at the end of the year, we are just going to have to see how things turn out. The country's economy remains, we believe, on a reasonably firm footing. While the risks going forward are the political risks of the election cycle, the Mexican companies we have in our portfolio seem to be doing absolutely fine.

Our largest holding in Brazil is Fleury S.A. a high-end medical diagnostics company. In good times and in bad, people are going to continue to have their blood drawn, have MRI scans, etc. We see Fleury as a "self-help" company with an individual story in an economically insensitive space. It is an idiosyncratic investment and we are not trying to play the economy getting either better, or worse. In South Africa, we continue to be defensively positioned relative to currency risk. Our holdings in the country are not large, but what we do have, most of it Naspers, has very little local income. Our considerations are enduringly political considerations and we remain concerned with the country's fiscal situation.

Download Commentary PDF with Fund specific information and performance.
For a complete listing of the holdings in VanEck Emerging Markets Fund (GBFAX) as of 12/31/17, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

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The January Effect: Fact or Fiction https://www.vaneck.com/blogs/allocation/january-effect-fact-fiction/ The Fund’s asset class positioning remains largely unchanged this month with allocations of 75% to stocks and 25% to bonds.

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VanEck Blog 1/18/2018 12:00:00 AM

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

December Performance

In December, the VanEck NDR Managed Allocation Fund (NDRMX) returned 0.79% versus 1.17% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index).

The Fund held a 75% allocation to stocks in December. This helped performance as global stocks returned 1.61% and bonds returned 0.46%. The Fund's regional equity positioning detracted from performance. The largest regional equity detractors from performance were overweight exposures to the U.S. and Europe ex. U.K., and underweight exposures to the U.K. and Canada. Within the U.S., the Fund performed in-line with its neutral allocation. We maintained a significant growth bias. This was the right positioning in small-cap stocks, but it detracted from performance in large-cap stocks.

Fund Positioning January 2018: New Year, Same Allocations

In January, our asset class positioning remained largely unchanged. We are allocated 75% to stocks and 25% to bonds. Our regional equity allocation shifts were minimal. They included reduced allocations to Europe ex. U.K., Pacific ex. Japan, and the U.S. We now have larger allocations to the U.K., Japan, and the Emerging Markets. The U.S. equity allocation to growth stocks was reduced. The Fund is now neutral growth and value.

Fund allocation chart as of January 2018

Source: VanEck. Data as of January 3, 2018.

2017 Performance Review

What a year! The S&P 500 Index returned 21.83%, the MSCI All Country World Index returned 23.97%, and the MSCI Emerging Markets Index returned 37.28%. The Fund returned 15.15%. Although it was close, the Fund lagged its benchmark return of 15.77%. Since inception (May 11, 2016), the Fund has outperformed with a return of 21.21% versus 20.27% for its benchmark. This performance places the Fund within its Morningstar Tactical Asset Allocation peer group in the 29th percentile in 2017 and in the 28th percentile since inception. Overall, we are pleased with these results and thank our investors for their support. We wish you a happy, healthy, and successful new year.

Global Balanced Positioning Relative to Neutral*

In 2017 the Fund's asset class positioning was a strong contributor to performance. The Fund's average exposure to global stocks in 2017 was 75%. This helped performance as global stocks outperformed bonds by 21.08%. We started the year with a significant overweight to stocks, scaled it back gradually into the summer, and then went meaningfully overweight stocks again in the fourth quarter.

Global Regional Equity Positioning Relative to Neutral*

The largest detractor from performance last year was our underweight exposure to the Emerging Markets. Emerging Markets stocks were the top performing equity region last year and we were underexposed to this region. The largest regional equity contributor to performance was our overweight exposure to Europe ex. U.K., which returned 27.81%.

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

The Fund's 2017 U.S. market cap and style positioning underperformed its neutral allocation. Our tactical shifts in small cap versus large cap detracted from performance. The Fund was overweight growth over value. This was a positive contributor to performance as growth stocks (Russell 3000 Growth Index) outperformed value stocks (Russell 3000 Value Index) by 16.39%.

Total Returns (%) as of December 31, 2017
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
0.79 15.15 15.15 12.44
Class A: Maximum 5.75% load -5.01 8.55 8.55 8.46
60% MSCI ACWI/
40% BbgBarc US Agg.
1.17 15.77 15.77 11.86
Morningstar Tactical Allocation
Category (average)1
0.95 12.61 12.61 10.49

Total Returns (%) as of September 30, 2017
  1 Mo YTD 1 Year Since Inception
Class A: NAV
(Inception 5/11/16)
0.95 10.70 11.27 11.65
Class A: Maximum 5.75% load -4.86 4.36 4.86 7.00
60% MSCI ACWI/
40% BbgBarc US Agg.
0.99 11.71 11.25 11.25
Morningstar Tactical Allocation
Category (average)1
0.94 8.58 9.01 9.67

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

Returns less than a year are not annualized.

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

Weight-of-the-Evidence

Happy New Year! With the start to the New Year comes the customary Wall Street chatter about the “January Effect.” The perceived wisdom is that stock prices fall in December as investors look to harvest tax-losses to offset realized capital gains. Then, in January, prices rise as investors pile back into stocks. Is this accurate? In modern times do stocks typically fall in December and rise in January? Let's investigate.

This diagram shows the average monthly returns of the S&P 500 Index, for each month, going back 20 years.

Chart of monthly returns of the S&P 500 based on a 20-year average

The average monthly return for the S&P 500 Index over this period was 0.67%. We can see that the average return for stocks is 1.59% in December and -0.61% in January. This is the exact opposite outcome that the January Effect prescribes. I think that we can close the book on this one.

That being said, the weight-of-the-evidence points to high stock prices this January, but it has nothing to do with the January Effect. The evidence pointing to higher stock prices is plentiful. Certain indicators have remained bullish for some time. These include the global economic Purchasing Managers' Index (PMI) manufacturing, global central bank monetary policy, sentiment, and stock price momentum indicators. One indicator that turned bullish in December is global market breadth. I wrote at length about this indicator last month. Global breadth measures stock market participation at the country level. More participation equals higher conviction that the positive trajectory of stocks will continue. The diagram below shows that country participation in this stock market rally is high. This is good for stocks!

NDR Global Breadth Indicator

NDR Global Breadth Indicator Chart

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

One indicator that just turned bearish is seasonality. It measures the historical price patterns that result from the market's recurring tendencies. Similar to the S&P 500 results discussed above, this indicator predicts that January will be a bad month for stocks.

Seasonality indicator chart

Additional Resources

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Natural Resources Buoyed by Growth Outlook https://www.vaneck.com/blogs/natural-resources/bouyed-by-growth-outlook/ ]]> VanEck Blog 1/11/2018 12:00:00 AM

4Q'17 Hard Assets Strategy Review

During the quarter, VanEck's hard assets strategy returned 8.71% (measured by VanEck Global Hard Assets Fund, Class A (GHAAX), excluding sales charge). On a relative basis, the Fund outperformed its commodity equities-based benchmark index, the Standard & Poor's® (S&P) North American Natural Resources Sector Index (SPGINRTR), which returned 5.94% over the same period.

Market Review

Underpinning nearly all positive commodity price performance during the quarter were improved demand fundamentals fueled by synchronized global growth among developed and emerging markets.

Crude oil prices continued to firm through the quarter, driven mainly by persistent demand, declining global inventories, compliance from OPEC and Russia on self-imposed oil production quotas, and extended commitments to those quotas into 2018. While returns in the energy equity sector were, on average, positive during the quarter, the unprecedented decoupling of performance of higher-beta energy stocks – in particular, of unconventional oil and gas exploration and production (E&P) companies – from crude oil prices persisted through the end of the year. Weaker relative performance combined with, by and large, a growing unrest among the investment community with E&P companies' limited shareholder returns, perpetuated outflows.

Within diversified metals and mining, the combination of global demand support, Chinese capacity rationalization, and company financial discipline led to more balanced markets, better commodity prices, and stronger equity performance. After pulling back briefly in November, diversified metals and mining stocks rallied by quarter end on the back of stronger copper and zinc prices, which climbed to four-year highs.

Within the agriculture sector, fertilizer demand was satisfactory with both potash and urea markets coming slowly back into balance. Following what appears to have been a bottom in the third quarter, fertilizer stocks started to reverse trend and eventually outperformed the underlying price of fertilizers. Protein markets also continued to fare well with better beef and chicken prices.

Top Quarterly Contributors/Detractors

Top Quarterly Contributors/Detractors Chart

Source: FactSet; VanEck. Data as of December 31, 2017.

Contribution figures are gross of fees, non-transaction based and therefore estimates only. Figures may not correspond with published performance information based on net asset value (NAV) per share. Past performance is not indicative of future results. Portfolio holdings may changes over time. These are not recommendations to buy or sell any security.

Outlook

We exit 2017 with the strongest global economic growth forecasts since the financial crisis. With an outlook for further synchronized growth in 2018, we see tighter supply and demand balances for a vast majority of the commodities that we follow closely.

Within energy, we continue to monitor how the investment merits of the sector are being considered by investors. Energy companies, especially those in unconventional oil and gas exploration and production, are increasingly under the microscopes of investors after years of heavy investment in acreage acquisitions and infrastructure build out.

While we view much of this investment over the last decade as "sunk" capital necessary for future growth and profitable production extending into at least the early 2020s, we also believe that the focus of E&P companies should now be on moderate growth, cash flow generation, spending within cash flow, and delivering returns. E&P companies have listened and we have already started to see dividends and share repurchase programs from some.

It is important to remember that, on a technical basis, commodities and natural resource equities also exist in a quantitative/factor driven market, with momentum playing a significant role. The energy sector of today may well be compared to the metals and mining sector of three years ago when many of the major companies were considered all but bankrupt. Now these mining companies have significantly less debt, are throwing off cash, and delivering solid returns – aided by a rationalization process which eventually drove increased allocations to the metals and mining sector in 2016 and 2017. A market in which momentum factors drive fund flows is self-reinforcing and we would not be surprised if the metals and mining sector performs well once again in 2018 as a result.

One of the main pillars of our investment philosophy continues to be to look for long-term growth. Positioning our portfolio for the future and not just reacting to current circumstances is of paramount importance and our focus 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.

For a complete listing of the holdings and performance, please visit VanEck Global Hard Assets Fund (GHAAX).

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Tax Reform Adds Fuel to Gold’s Engine https://www.vaneck.com/blogs/gold-and-precious-metals/tax-reform-adds-fuel/ ]]> VanEck Blog 1/9/2018 12:00:00 AM

Gold's Yearend Pattern Repeated: Oversold Ahead of Rate Increase Then Rebound

The Federal Reserve (the "Fed") raised rates for the third time in 2017 following the Federal Open Market Committee (FOMC) meeting on December 12. Since 2015, gold has established a yearend pattern where it becomes oversold ahead of the December Fed rate decision. This pattern repeated again this year as the gold price trended to a five-month low of $1,236 per ounce on the day of the Fed meeting and then promptly rebounded from the Fed-induced low to end December with a $28.11 gain (2.2%) at $1,303.05 per ounce. Commodity price strength also aided gold as copper and crude oil both made multi-year highs in the last week of the year.

Gold stocks also tested their second half lows on December 12 and, like gold bullion, staged a comeback to end December with the NYSE Arca Gold Miners Index1 (GDMNTR) rising 4.6% and the MVIS Global Junior Gold Miners Index2 (MVGDXJTR) gaining 8.1% for the month.

Strong 2017 Performance on Geopolitical Risk, U.S. Dollar Weakness, and Commodities Strength

Gold and gold stocks performed well in 2017. The gold price advanced $150.78 per ounce (13.1%), the GDMNTR was up 12.2%, and the MVGDXJTR gained 6.2%. These gains were impressive for a market in which investors generally showed little interest in gold while being preoccupied with new records in the stock market, bitcoin, and ancient art. Gold also did not receive much help from the physical markets, as Indian demand remained near the lows of 2016 and China's central bank refrained from purchasing gold. The resilience in the price of gold came from a global sense of geopolitical risk and uncertainty, overall strength in commodities, and unexpected weakness in the U.S. dollar. Gold stocks typically outperform gold bullion in a positive gold market. However, this year was one of mean reversion after a strong 2016 (GDMNTR up 55%), along with a lack of sizzle that investors are seeing elsewhere. Healthy earnings and increased guidance among gold companies were not enough to capture much investor interest in 2017.

Tax Reform Adds to Deficit, Increases Systemic Risk

Anyone hoping that Washington D.C. would become fiscally responsible under Republican Party rule has seen their hopes go up in flames, as new tax rules appear likely to drive the U.S. deeper into debt. Some say economic growth created by tax cuts will likely generate more government revenue. In a recent Wall Street Journal article, ex-Congressional Budget Office (CBO) director Douglas Holtz-Eakin stated that he believes tax policy can partially offset costs if it is well designed. We believe the new tax code is not well designed, as it is nearly as complicated as the old one, widely unpopular, and contains many provisions set to expire in 2025. The tax windfall corporations will receive comes at a time when profits are high and cheap credit is plentiful. If companies were inclined to spend more on capital expansions, they would have done so already, but instead many companies have used cash to buy back stock and pay dividends. We believe it is too late in the cycle for tax stimulus to have a lasting effect. In addition, fiscal stimulus has limited effects when debt levels are high, as they are today. None of the federal income tax cuts since 1980 have succeeded in shrinking the deficit through growth. The Reagan tax cuts of 1981 could not forestall a recession that started in July of that year, caused by tighter Fed policy. Similarly, any growth resulting from Trump's tax cuts could give the Fed more latitude to raise rates.

Tax reform will add an estimated $1.5 trillion to the deficit over ten years, according to the Joint Committee on Taxation (JCT). In October, the U.S. Treasury Department reported the budget shortfall increased 14% in 2017 to $666 billion, which is equal to 3.3% of GDP. At $16 trillion, public federal debt is 85% of GDP and Harvard University economist Jason Furman estimates debt escalating to 98% of GDP by 2028. The CBO figures interest charges will consume 15% of federal revenues in 2027, up from 8% currently. The annual report from the trustees of the nation's largest entitlement programs show the trust funds running out for Medicare in 2029 and for Social Security in 2034. The new tax law only piles more onto this growing mountain of debt.

Total non-financial debt in the U.S. stands at $47 trillion, equal to 250% of GDP and $14 trillion more than at the peak of the last credit bubble when debt/GDP stood at 225%. Thanks to below market rates engineered by central banks, debt service has not yet become a problem. Low rates have forced investors to take on more risk in order to generate acceptable returns. Another side effect is the proliferation of European "zombie companies", meaning their interest cost exceeds earnings and kept on life support by banks fearful of losses if the companies declare bankruptcy. The Bank for International Settlements (BIS) estimates that 10% of publicly traded companies in six major European countries are zombies. As central banks embark on tighter policies, at some point higher rates could create debt service problems. Gluskin Sheff3 reckons every percentage point rise in the level of rates will ultimately drain 2.5% out of nominal GDP growth.

Looming Economic Downturn, Decline in Markets Supports Gold Allocation

It appears the only way to stop sovereign debt from growing is through tax increases or spending cuts. By now it should be clear that these options are politically impossible, which suggests that deficits will continue to grow until they cause a crisis severe enough to motivate change. "Crypto-mania" and a stock market that goes nowhere but up indicates that a crisis is the last thing on investors' minds. However, in our opinion, we are at a stage in the cycle when concerns should be high. The expansion is heading into its ninth year. The economy is at full employment and the personal savings rate has declined from 6% in 2015 to 2.9% in November. By now many have bought their first home, a new car, remodeled the kitchen, taken that overseas vacation, or bought a second home. Some are in a position to speculate on their favorite ETF, cryptocurrency, or FAANG stock (Facebook, Apple, Amazon, Netflix, and Google). There comes a point when investors are all-in and something happens that triggers a selloff – a geopolitical event, an economic downturn, or a black swan4 emerges. Markets decline, but there are few investors with the capacity or desire to buy more, so markets decline more. Momentum kicks in and there's more selling until sentiment turns for the worse. The selloff becomes a contagion that spreads uncontrollably. It has happened to tech stocks and it's happened to instruments linked to mortgage securities. It is likely to happen again.

Based on the gold price strength following December rate increases in 2015 and 2016, we expect to see firmness in the gold price in the first quarter. However, headwinds may come for gold if economic growth enables the Fed to tighten more than expected. Also, the U.S. dollar might strengthen if the new tax code causes corporations to repatriate profits stockpiled overseas. We believe any weakness in gold during the first half of 2018 could be transitory. Moving through 2018 and into 2019, we believe the chance of an economic downturn increases, along with the probability of a significant decline in the markets. High levels of debt could cause a downturn to turn into a financial crisis. We now know that quantitative easing5 and below-market rates have failed to generate needed growth or inflation. In the next crisis, look for central banks to resort to even more radical policies, such as directly funding treasuries. It is conceivable that there could be global currency debasement on a scale never seen before. In such a scenario, hard assets, especially gold and gold stocks, could significantly outperform most, if not all, other asset classes in our opinion. There comes a time in every economic cycle when investors should seek portfolio insurance. We believe the time is now.

Download Commentary PDF with Fund specific information and performance

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Strong Finish to 2017 https://www.vaneck.com/blogs/moat-investing/strong-finish-to-2017/ International and U.S. moats both finished 2017 ahead of their respective broad market indices for the year, while U.S. moats, in particular, impressed in December.

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VanEck Blog 1/9/2018 12:00:00 AM

For the Month Ending December 31, 2017

Performance Overview

International moats, as represented by the Morningstar® Global ex-US Moat Focus IndexSM ( MGEUMFUN, or "International Moat Index"), trailed the MSCI All Country World Index ex-USA in December (1.75% vs. 2.24%), but finished with full-year outperformance of greater than 3% (30.36% vs. 27.19%). The U.S.-oriented Morningstar® Wide Moat Focus IndexSM ( MWMFTR, or "U.S. Moat Index") followed a strong November with positive relative performance in December, toping the broad U.S. markets as represented by the S&P 500® Index (1.66% vs. 1.11%). The U.S. Moat Index finished the year ahead by roughly 2% (23.79% vs. 21.83%).

International Moats: Japan Weighs, Australia and Brazil Boost

Together with several firms from Japan, utilities and telecommunications firms struggled in the International Moat Index for the month. The bottom three performing companies in the International Moat Index were Japanese companies. Nippon Telegraph & Telephone Corp (9432 JP, -10.43%), which owns mobile telephone operator NTT DoCoMo, struggled in December after posting quarterly results generally in line with expectations in November. SoftBank Group Corp (9984 JP, -6.58%) also struggled in December. The company has a wide range of international and e-commerce investments in its portfolio, some of which compete directly with the aforementioned Nippon Telegraph & Telephone Corp. On the other side of the coin, financials and consumer discretionary companies contributed strongly to International Moat Index returns and the Index also received a strong boost from companies in Australia, Hong Kong, Canada, and Brazil. The International Moat Index standout was Brazilian aviation company Embraer SA (EMBR3 BZ, +26.46%), following speculation that Boeing was in talks to buy the company. Shares of Embraer SA shot up and approached Morningstar's fair value estimate of $26 per share at year end.

U.S. Domestic Moats: Consumer Discretionary Shines

Consumer discretionary companies were the primary driver of strong performance for the U.S. Moat Index in December. While Express Scripts Holding Co (ESRX US, +14.51%) was the top performing index constituent in December, firms such as Lowe's Companies, Inc. (LOW US, +11.48%), Twenty-First Century Fox Inc. (FOXA US, +8.11%), and L Brands Inc. (LB US, +7.40%) helped consumer discretionary lead the way. Tech firm Veeva Systems Inc. (VEEV US, -8.19%) was the worst performing stock in the U.S. Moat Index after issuing 2019 fiscal year guidance below expectations. The firm provides client relationship management services to the pharmaceutical industry and Morningstar lowered its fair value estimate four dollars to $65 on December 6th. The consumer staples and information technology sectors were the two sectors to detract from index performance, but only slightly.

 

(%) Month Ending 12/31/17

Domestic Equity Markets

International Equity Markets

(%) As of 12/31/17

Domestic Equity Markets

International Equity Markets

(%) Month Ending 12/31/17

Morningstar
Wide Moat Focus Index (MWMFTR)

Top 5 Index Performers
Constituent Total Return
Express Scripts Holding Co 14.51
John Wiley & Sons Inc Class A 11.70
Lowe's Companies Inc 11.48
AmerisourceBergen Corp 8.25
Twenty-First Century Fox Inc Class A 8.11

Bottom 5 Index Performers
Constituent Total Return