An Interesting Seasonal Idea

There are scores of seasonal trade ideas, and investors do not have to limit the search for valid seasonal themes to U.S. assets.

Seasonality applies to emerging markets assets as well, including bonds. In fact, the seasonally strong period for emerging markets bonds has arrived, which could point to more near-term upside ahead for the WisdomTree Emerging Markets Local Debt Fund ELD. Even with all the concerns regarding President Donald Trump's impact on emerging markets assets and the effects of higher U.S. interest rates on debt issued by developing economies, ELD is up 8.5 percent off its November lows.

Actively Managed ETF For A Seasonal Trade: ELD

The actively managed ELD, which turns seven later this year, holds bonds denominated in local currencies from Brazil, Chile, Colombia, Mexico, Peru, Poland, Romania, Russia, South Africa, Turkey, China, Indonesia, Malaysia, Philippines, South Korea and Thailand.

“EM performance within the February-through-April window is distinct from other three-month investment windows. EM local debt, corporate, USD-based sovereigns and equities all post their most consistent performance during the window. While other windows tend to be lifted by greater one-time gains, the gains during the early spring period tend to be consistent, and losses are less frequent and shallower in scope,” according to a recent WisdomTree note.

While many market observers believe the Federal Reserve is on course to raise borrowing costs multiple times this year, the longer the Fed holds off on that, the better for ELD because a stronger dollar is likely to pinch emerging markets currencies.

Allocations

Russia and Brazil are ELD's two largest country allocations, a notable trait for a couple of reasons. First, Russia could see its investment-grade sovereign credit rating restored. Second, Brazil is in a new monetary easing cycle. Those countries combine for 22.5 percent of ELD's weight.

Seasonality And Historical Performance

Returning to seasonality, historical data suggest now is a good time to own emerging markets bond denominated in local currencies.

“Among the bond sectors, EM local debt shines brightest during this period, generating substantial excess returns versus EM corporate and EM USD sovereigns. Positive contribution from foreign exchange (FX) is a significant piece of this excess return performance,” said WisdomTree.

About 76 percent of ELD's holdings are rated BBB or A. The ETF has an effective duration of 4.76 years and a 30-day SEC yield of 5.78 percent.