Reach For Yield With These Risky Debt ETFs

August 18, 2014

With sovereign yields falling globally, here's where investors can still find income.


Chart courtesy of

It hasn't been a happy year for the global economy so far. Geopolitical tensions and economic weakness have dashed hopes for a long-awaited global recovery.

Most countries in Europe are on the verge of or are already in recession. Violence in the Mideast keeps the price of oil elevated, feeding inflation and slowing growth in emerging markets. Japan continues to muddle through its problems.

The only relatively bright spot remains the U.S. But even here the news is mixed: Mortgage applications just fell to a 14-year low—reflecting the faltering confidence of American consumers. Amid all these worries, investors have been seeking safety in sovereign debt and pushing interest rates down all over the world.

Here are three interesting funds with which to play the weakening global economy theme:

PowerShares Emerging Markets Sovereign Debt ETF (PCY | C-33)

China has been slowing down for a while now, and the 85 percent tumble in credit growth in July is the latest sign of trouble in the largest emerging economy. Many other developing markets are struggling too. This ETF invests in sovereign emerging market debt denominated in U.S. dollars—taking currency risk out of the picture for U.S. investors. It has returned more than 10 percent since the beginning of the year.

PowerShares DB Italian Treasury Bond Futures ETN (ITLY | C)

Italy is officially in recession now, and despite a crushing level of government debt, the interest rates on the country's bonds continue to fall. This ETN tracks an index of intermediate-term Italian government debt—it has returned almost 15 percent since the beginning of the year. Currency risk is part of the package here: A weakening euro would undermine returns.

PowerShares DB 3X German Bund Futures ETN (BUNT)

Germany's 10-year yield fell below 1 percent this week, as Europe's biggest economy contracted 0.2 percent in the second quarter. This ETN is a 3 times leveraged play on bunds and is definitely not for the faint of heart. It has returned more than 30 percent since the beginning of the year as German yields seem to follow in Japan's footsteps and become wafer thin. With deflation rearing its ugly head in Europe, and the ECB standing ready to apply more quantitative easing, the trend may not have run its course yet.

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