ETF Expert

With the financial credit crisis slamming developed countries particularly hard, even the risk of the U.S. defaulting on debt obligations has been a topic of debate. Certainly, the state of California finds itself in its biggest pickle, with the threat of defaulting on its debts a possibility. Who'd have thunk it?

Not surprisingly, the cost to insure government debt clear across the globe has risen substantially. Bespoke Investment Group produced a fascinating piece on the cost to insure against country default… how that cost has risen substantially in the last few months alone.

The cost to insure against the U.S. government defaulting is 0.6%. And while that insurance may not seem like much, it was a negligible 0.08% earlier in the year. The unthinkable is now conceivable.

Naturally, if there's a cost to insure (transfer risk) against what professors of finance teach is a "risk-free rate of return," then wouldn't the cost to insure against emerging market defaults be even higher? Yes, the cost to insure against individual emergers defaulting is anywhere from 3%-7%.

And yet, an appetite for risk seems to show signs of returning. Both the iShares JPMorgan Emerging Market Bond Fund (EMB) and the PowerShares Emerging Sovereign Debt Fund (PCY) had nosedived in mid-September. Yet they have both recovered a substial portion of their losses, recently rising above short-term trendlines.

For diversification purposes, the PowerShares Emerging Sovereign Debt Fund (PCY) was one of my favorite tools for September 07-September 08. The 8% yield was enticing as well. Yet stop-losses whittled them from client portfolios.

Emerging market bond ETFs shouldn't fluctuate all that much in price, much the way that they traded earlier. Moreover, the risk of default was mitigated by the diversification across 25+ countries. And the yield of 8% was the meal ticket.

Today, however, there are plenty of ways to pursue a 7%-8% yield with significantly less risk. You would look to the A-grade corporates in the iShares Investment Grade Bond Fund (LQD) for 6%-6.5%, and the likelihood of appreciation.

In brief, if I am going to ride the risk roller coaster, I can still get significant cash flow (dividends) and a reasonable expectation of appreciation from infrastructure/defensive equity plays like Utilities or Global Telecom. (Review "Top Stock ETFs" here.)

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.