We have been in a low interest6 environment since 1990 and the average inflation rate since 1990 is only 2.51%. Just ask your parents and grandparents how painful it is for them as they only get between 1% to 1.5% on a CD. Money Market and short-term Bond funds are no better, paying a meager 1% and 1.2% on an annual basis. What does the risk adverse do to gain extra yield without taking a risk on the equity market?
For some people they chase yield by buying international debt. The problem is that the stable western countries like Europe, Japan, South Korea, Israel, and Canada pay yields of between 0.5% and 1.5%, not a good substitute to U.S. based instruments. That means that investors who want more yields have to stick their toes into the Emerging Market debt market. There you can find yields of between 4% and 26% and most funds average about 6%. The problem is that the higher the yield, the more unstable the country is and a greater chance of default.
For example, Venezuela bonds gives the investor 26% yield but has had trouble paying the interest and most experts expect them to default. If that happens, most Emerging Market debt funds will drop significantly as the country's bonds make up 4% of the market. Moreover the 26% yield is almost 25% of the total yield of the Emerging Market debt funds. Therefore, the funds total yield of around 6% would drop to 4.5%!
Listed below are some of the bond yields for Emerging Market debt countries included in Mutual Funds and ETFs.s.
Country.....................................Bond Yield
Venezuela....................................26.13%
Iran............................................20.00%
Nigeria.........................................16.17%
Kenya..........................................13.10%
Brazil..........................................9.62%
South Africa..................................8.48%
Pakistani.......................................8.20%
Mexico.........................................6.78%
India...........................................6.66%
Russia.........................................7.57%
Columbia.......................................6.57%
Indonesia......................................6.45%
Argentina......................................5.76%
Greece.........................................5.55%
Vietnam........................................5.05%
Philippines.....................................4.65%
Chile............................................4.69%
China..........................................3.69%
The four countries in boldface are known as the BRIC countries and averages a yield of 6.9% and can make up the major portion of some of the Emerging Market debt funds. Most funds do not have Iranian bonds due to U.S. sanctions.
As one can see the more politically unstable the country is, the higher the yield as there is real risk of the country defaulting. In fact, its not uncommon for the Emerging Market debt funds to drop significantly as one or more countries fail to pay their debt and default. Furthermore, the fees range from almost 1% to 2% annually.
By contrast our TRS fixed income fund gives up a guaranteed 7% interest with no risk and no fees. For non-UFT members its 8.25%. Now that the TRS is eliminating their Bond fund, a real dog, please transfer the money into the fixed income fund rather than the balanced fund that offers no real advantage in a low interest rate environment and contains risk that defeats the purpose of the risk adverse investor..
