GLOBAL EXCHANGE TRADED FUND STRATEGIES
Prepared by Shu Chin Li, MS, MBA, CFA, ETF Portfolio Strategist
Second Quarter 2016 Performance Review
Global Balanced Strategy
Our global balanced strategy, which allocates among bonds, stocks, and commodities around the world, rose 2.2%
last quarter, improving the past 12-month return to 0.9%.
So far it’s been a good year for global asset markets; major assets recorded another winning quarter despite
weakened investor confidence and increased market uncertainties. Commodities kept up last quarter’s
momentum, surging another 10%; the strong result was again bolstered by higher oil and precious metal prices.
Global bonds, with the help of tumbling yields, gained another 2%, beating global equities for the second
consecutive quarter. The equities, although less glamorous, also reported an encouraging result, edging up 1% for
the quarter. Their performance was boosted by resilient US markets with low trading volatility.
Although those passing days were wonderful, can the good times last? We’re cautiously watching increased
uncertainties as gold—less correlated to other assets—climbed at least another $100 in the past three months,
global bond yields tumbled to their all-time lows, and the Brexit fallout has created an unpredictable future and
could result in a slowdown of the UK and European economies.
Global bond markets rallied in the past six months as collapsing global yields lifted bond prices around the world.
The latest episode ended with plunging US long-duration bond yields—10-year and 30-year treasury yields at or
near their all-time lows. The US yield curve, a traditional indicator of economic health, flattened further to tighten
up the spread between 10-year and 2-year treasury yields to the smallest level in seven years. A flatter yield curve
has historically signaled a higher chance of a recession. In the US credit markets, rating agencies have
downgraded more corporate bonds, resulting in the highest number of downgrades since 2009. The worsening
credit quality may indicate fears of a rise in corporate default rates. Despite negativity, US bonds booked a 2%
return for the quarter, led by US high-yield bonds which jumped 10% in the last three months. The bond
performance suggested a tepid US economy, no immediate increase in US policy rates, and plenty of liquidityseeking for positive yields.
As of the quarter’s end, over $10 trillion worth of international sovereigns—more than a third of total global
government bonds outstanding--offer negative yields. The negative yield phenomenon also encouraged investors
to revisit risky emerging bond markets for better rewards. Emerging market bonds, as measured by JP Morgan
Global Emerging Bond Index, extended another 4.5% gain last quarter, raising the 6-month return to 10.3%.
Depressing bond yields failed to deter investors from pouring money into equities. Global stocks managed to rise
1.6% during the second quarter, a result bolstered by a 2.5% gain of US stocks. Overseas markets were lacking
enthusiasm; emerging markets were up less than 1%, and developed markets suffered from the UK’s vote to
divorce the EU, dropping 1.2% for the quarter.
During the same period, our strategy’s equity portion returned 1.5%, reducing the 12-month loss to 3%, and the
bond portion was up 2%, bringing the 12-month gain to 5.5%. At the quarter’s end, the equity and commodities
portion accounted for 54% of the strategy’s assets, and bonds accounted for the remaining 46%. Specifically, 23%
of strategy assets were invested in US Equities, 22% in foreign equities, 23% in US bonds, 23% in foreign bonds
and 9% in commodities.
GLOBAL EXCHANGE TRADED FUND STRATEGIES
Prepared by Shu Chin Li, MS, MBA, CFA, ETF Portfolio Strategist
Second Quarter 2016 Performance Review
Emerging Markets Strategy
Our emerging markets strategy, which invests in less-developed companies and economies, gained 3.4% in the
past three months, lowering the last 12-month loss to 2.5%.
Emerging markets enjoyed another positive quarter as the rally among emerging market bonds, stocks and
currencies continued. More investors returned to emerging markets after the strong first quarter as the global
search for higher yields resumed, China’s fiscal stimulus appeared to be working, and the reduced energy supply
increased prices among resources-related assets. Emerging market bonds advanced at least 2% and emerging
market equities managed to rise nearly 1%.
The Federal Reserve’s inaction and plunging US bond yields boosted the strong performance in emerging market
bonds. In the past six months, the Fed altered the pace of rate increases because of mixed signals in the US
economy and job growth numbers. The latest cause of its delay was the Brexit’s shock that triggered a global
equity sell-off, and, simultaneously, collapsed US treasury yields to historic lows. The interest rate developments
narrowed the premium investors demand to own emerging market bonds over US treasuries, and also helped
improve the outlook for emerging market corporate credit. The number of credit downgrades by global rating
agencies dropped sharply. Emerging market debt, as measured by JP Morgan’s Global Emerging Market Index,
rose nearly 4.5% for the quarter, and the local currency debts in the region also advanced 2.5% in dollars.
The improved debt outlook also eased investors’ concern on China’s debt strain; its debt-to-GDP ratio has risen to
what appears to be an unsustainably high level over the past seven years. So far, the consensus seems to be that
China’s government can manage the situation; it allows heavily indebted state-owned companies to swap bad
debts into equities to improve their balance sheets. At the same time, the Chinese government embarked on a
program of fiscal stimulus to keep the economy afloat to prevent deflation. The tactic, so far, has revived real
estate activity and prices, but may eventually work its way into Chinese stock markets, which had another
disappointing loss, down 1.7% in the past three months.
The expected Chinese slump did not materialize, which was good news for global commodity markets. At the
same time, the reduction in US shale production also helped crude prices to rebound to the $50 per barrel level.
Emerging markets such as Brazil and Russia, among others, are traditionally highly correlated with commodity
prices that are closely tied to their economies. Since the start of this year, as crude oil prices were rallying, the
Brazilian real and Russian ruble were also appreciating against the US dollar. Beside the strengthening currencies,
both countries’ stock markets were also soaring; Brazil jumped another 14%, bringing the 6-month gain to 43% in
dollars, and Russia also rose 4%, accumulating a 20% return as of the end of June. Rising stock prices bring hope
that Brazil’s dismal economic circumstances may improve.
Our strategy’s equity portion returned 3.4% for the quarter, reducing the 12-month loss to 10%, and the bond
portion gained 3.9%, bringing the return to 8.5% for the last 12 months. At the quarter's end, equities constituted
59% of the strategy, of which 33% was invested in Asia, 12% in Latin America, 9% in Eastern Europe, and 5% in the
Middle East and South Africa. The balance of the strategy was invested in fixed income securities.