Market Vectors’ Fran Rodilosso on Why Income Investors Are Under-Allocated to Emerging Markets

Market Vectors’ international high-yield corporate bond portfolio manager Fran Rodilosso today commented on why he believes income investors are not allocating enough to emerging markets, and how this under-allocation is causing investors to miss out on the potential to benefit from current favorable yield and quality trends in emerging markets versus developed markets.

Rodilosso noted that even against a backdrop of global economic crisis, emerging market bonds, including U.S. dollar- and local currency-denominated sovereign and corporate issues, have produced returns averaging between 8.6 to 9.2 percent annually from mid-2007 to June 20121, buoyed by improved economic and credit fundamentals among both sovereign and corporate issuers. “The trends since 2007 are worth noting,” said Rodilosso. “Emerging markets have been tested and they have held up very well through the recent crisis. These returns were better than what we saw in U.S. high-yield2 and U.S. investment grade3 for the same period.”

In comparison, U.S. Treasuries have returned 9.7% annually since 20074 , but Rodilosso noted his belief that this may be more a function of the risk-off trade sparked by fears surrounding Europe and that such returns from Treasuries would seem to indicate investors overlooking the divergent economic fundamentals between emerging and developed markets.

“When you consider the triple digit debt/GDP ratios of developed countries and the lower default rates and investment grade quality among a majority of emerging market issuers, I believe that the risk/reward dynamic for Treasuries and other G-7 debt is increasingly unappealing,” said Rodilosso. “The gross government debt/GDP for developed economies has grown from 73.1 percent in 2007 to 103.7 percent in 20125. In contrast, at the same time the gross debt/GDP for emerging market countries has fallen from 36.1 percent in 2007 to 34.6 percent5 in 2012.”

Investors still tend to have the “Pavlovian response” of reducing their emerging market exposure as a response to negative news anywhere in the world, noted Rodilosso. Emerging Market local currency bonds in particular were hard hit in the third quarter of 2011 and at various times this year. Additionally, he explained that although there are some specific risks associated with various local markets, in general, the reactive, “risk-off” selling could create attractive entry points.

“In spite of all these factors, we see a large number of investors under-allocated to emerging markets, particularly in the local currency and corporate debt spaces,” said Rodilosso. “In my opinion, as the dominoes keep falling across developed markets and focus shifts from Europe to Japan and ultimately to the U.S., fixed income investors may be well served by diversifying into more of the emerging world.”

Mr. Rodilosso, who joined the Market Vectors team earlier this year, has more than 20 years of senior level experience in emerging market, high-yield debt research and portfolio management.

Mr. Rodilosso currently manages three Market Vectors high-yield corporate bond ETFs, Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), International High Yield Bond ETF (NYSE Arca: IHY) and the most recent addition to this fund family, Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM).

1 J.P. Morgan – EMBI Diversified, CEMBI Diversified and GBI-EM Diversified
2 BofA Merrill Lynch US High Yield Index
3 BofA Merrill Lynch US Corporate Index
4 Barclays U.S. Treasury 7-10 Year
5 IMF World Economic Outlook (April 2012)

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Van Eck Associates Corporation does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.

Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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About Market Vectors ETFs

Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family currently totals $23.6 billion in assets under management, making it the fifth largest ETP family in the U.S. and eighth largest worldwide as of June 30, 2012.

Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and manages approximately $32 billion in investor assets as of June 30, 2012.

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There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.

The Funds, as they invest in high yield securities, may also be subject to a greater risk of loss of income and principal than higher rated securities. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability. The prices of high yield securities are likely to be more sensitive to adverse economic changes or individual issuer developments than higher rated securities. The secondary market for high yield securities may be less liquid than the market for higher quality securities and, as such, may have an adverse effect of market prices of certain securities. As the Fund may invest in securities denominated in foreign currencies and some of the income received by the Fund will be in foreign currency, changes in currency exchange rates may negatively impact the Fund’s return. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability. Investors should be willing to accept a high degree of volatility and the potential of significant loss. For a more complete description of these and other risks, please refer to the Fund’s prospectus and summary prospectus. The Fund may loan its securities, which may subject it to additional credit and counterparty risk.

The “net asset value” (NAV) of an ETF is determined at the close of each business day, and represents the dollar value of one share of the ETF; it is calculated by taking the total assets of an ETF subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as an ETF's intraday trading value. Investors should not expect to buy or sell shares at NAV. Total returns are based upon closing “market price” (price) of the ETF on the dates listed.

Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called “creation units” and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principally in kind. Shares may trade at a premium or discount to their NAV in the secondary market.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 888.MKT.VCTR or visit vaneck.com/etf. Please read the prospectus and summary prospectus carefully before investing.

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