Investors are scrambling to get higher yields while also trying
to protect against capital loss if and when interest rates start
climbing. To develop securities to fill this need, ETF-makers are
combing the globe, looking for short-term debt of riskier
companies. There is short-term debt in both US and emerging markets
that merits consideration. Especially in emerging markets, there
are corporate debt offerings that may offer yield pickup and
diversification benefits that are better than in the US and other
advanced economy countries.
Investors are likely to experience volatility along the journey to
the destination of high-yield short-term debt. Investing in foreign
securities, including emerging market securities, could involve
heightened risks from factors such as currency fluctuations, and
political and economic risks. Also, the increase in global investor
interest in emerging markets could make security valuations
relatively high at times. Overall, however, given the emerging
markets' strong economic fundamentals and increasing role in global
economic activity, emerging markets debt could offer a sensible,
but still risky way to get higher yield.
One ETF to consider is the
PowerShares Global Short Term High Yield Bond
(NYSEARCA:PGHY ). The ETF is based on the DB Global Short Maturity
High Yield Bond Index. The Index will generally invest at least 80%
of its total assets in US and foreign short-term, non-investment
grade bonds included in the Index, all of which are denominated in
US dollars. The ETF does not include all of the securities that are
listed in the Index, but uses a sampling method in seeking to
achieve its investment objective. The ETF, as well as the Index,
rebalances quarterly and reweights annually.
As of November 1, 2013, the 30-day SEC yield is 3.61%. This yield
is based on its payments over the last 30 days. The distribution
yield is 4.78%. This yield is based on interest return plus any
other distribution. The effective duration of PGHY is 1.39 years.
Duration is the number of years that is required for an investor to
receive the value of all future payments, both interest and
principal, from a bond. The length of time it takes to receive
payments will reflect in a bond's sensitivity to bond prices,
because the shorter the duration is, the less sensitive the bond
will be to changes in interest rates.
About half of PGHY is invested in companies domiciled in the US.
The other half is invested in companies domiciled in emerging
markets such as Russia, Ukraine, Venezuela, and Brazil. This list
of countries highlights that PGHY does have risk. Also the quality
allocations are low, with 43% of the debt rated BB, and 31% rated
B, both ratings from S&P.
Investing in Markets Through FDIC-Backed CDs
An investor in PGHY is subject to risk. If an investor doesn't want
to be in the market, there are other ways to invest and be linked
to market changes without taking on a direct amount of risk. One of
these is through Market Linked Certificates of Deposit (MLCD). I am
referring to those MLCDs that are FDIC-backed, and an investor
needs to be careful and check to see who is backing the MLCD. Not
all MLCDs are FDIC-insured. MLCDs participate in stock market moves
and are offered with links to different markets, including emerging
markets' and developed countries' indices. Also MLCDs are offered
with links to other asset classes, such as currencies or
The details of each are spelled out in each offering's Preliminary
Disclosure Supplement, and should be read and understood before
buying an issue. The MLCDs I favor are those that specify that if
an FDIC-insured MLCD is held to maturity, FDIC guarantees the
return of principal, no matter what the market does. Maturities are
usually in the four- to six-year range. Usually there is interest
paid for the time the CD is held. Many of these CDs have a
"Survivor Option," meaning that if you die before the CD matures,
your heirs can redeem the CD at par. MLCDs are offered by major
banks such as
) , and Union Bank.
Typical terms are that at maturity the CD pays back your principal
plus the greater of a percentage, for example, 2% for the term held
or the sum of the quarterly percentage changes of the index, which
is related to the performance of an index, such as the
S&P 500 Index
( INDEXSP:.INX) . Negative quarterly percentage returns are usually
uncapped, and positive quarterly percentage returns are sometimes
capped at 4% to 5%. The purpose is to capture 60% to 80% of the
gain of the index, depending on the issue. Typically there is no
guarantee that there will not be a loss if a CD is sold before
maturity, if the CD can even be sold before maturity, since there
is usually no guaranteed secondary market.
Another way to invest in the market, and a method that's especially
relevant when looking at the bigger picture, is through annuities.
Annuities are contracts between an investor, or annuitant, and an
insurance company. Annuities are designed to provide an income
stream immediately or in the future. There are differences between
annuities and other investment strategies, not the least of which
is that the backing of annuities is the insurance company. So there
is credit risk with annuities, but this risk varies from state to
state, as some states have an insurance pool to protect insurance
buyers from some of their risk.
With some annuities, returns are tied to the performance of an
index, such as the S&P 500 Index. There is risk, of course,
since markets do go down, but some annuities guarantee a return and
give an upside potential if an index does perform. Annuities are
different animals than securities and the two should not be
confused. For instance, annuities cannot be sold, are not traded,
and typically have a large penalty if surrendered before maturity.
Editor's Note: Max Isaacman is the author of
Blizzard of Money
Winning with ETF Strategies
Investing with Intelligent ETFs
How to Be an Index Investor
The NASDAQ Investor.