I am retired and take educated guesses on all things financial.

January 10, 2008

January 11, 2008: PowerShares Emerging Markets Sovereign Debt ETF (PCY), a vote of confidence

Almost all articles dealing with securities written from a point of view that avoids politics. This makes sense. Who wants to go out on a limb and predict political circumstances in an investing forum? However, in more and more instances, I believe that commentators on ETFs and other readily available funds should comment on informed basic political implications as well as the potential profitability of the target investment.

Such is the case with the PowerShares Emerging Markets Sovereign Debt ETF (PCY).
Launched on October, 2007, the fund is based upon the Deutsche Bank Emerging Market U.S. Dollar Balanced Liquid Index. The fund provides access to sovereign debt comprising approximately twenty-six emerging market issues. Essentially, the fund holds dollar-denominated debt that is high yield because the issuing country is deemed to be of relatively moderate risk, economically and politically.Approximately 27% of the debt is rated high quality,69% is rated as being of moderate risk and 4% worse. The security maturity averages out to be about fourteen years. The current yield is 8.01% at $25.81 per share. Distributions are paid monthly. The market value of PCY is about $41 million dollars and trades at a very slight premium to asset value.

The portfolio of this ETF is well dispersed to achieve maximum yield punch and to neutralize political uncertainty, with no sovereign debt security commanding more than 4.75% of assets. Countries represented in the PCY portfolio are Uruguay, Ukraine, Peru, Venezuela, Poland, Hungary, South Africa, Russia, Bulgaria, Qatar, Chile, The Philippines, Viet Nam, South Korea, Panama, Indonesia, China, El Salvador, Colombia, Brazil, Turkey and Mexico.

Looking outwards, there is no country on this list which is likely to default because each country needs to retain and service debt to grow its economy. To default would be ruinous to them, regardless of their political system. Warren Buffet recently began to invest outside of the United States. When asked about the risk of investing outside the United States by a CNBC reporter, he remarked that there was some risk everywhere, and that to not invest outside of the United States appropriately is not good business. PCY is appropriate and well-reasoned. In each of the countries above, our government has blossoming trade relations (South Korea, China and Brazil), military and education links (practically all) or solid reasons to be patient (Venezuela and Viet Nam). It is also likely that the United States will be entering a period of introverted political policies not unlike several decades of the 19th and 20th centuries. Emerging markets will thus be naturally growing faster through internal production, trade and consumption - more so with each other.

I do not predict any of the above will be a long term detriment to the United States, unless our military is gutted. I do see the future as a very positive time to own high yield sovereign debt, especially when packaged in a good geo-political manner with low expenses (.50%). PCY may fit nicely into your diversified portfolio.

DISCLOSURE: I own PowerShares Emerging Markets Sovereign Debt ETF (PCY) as a recent addition to my Speculative Portfolio.

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