The continued rally in emerging markets funds is the big story of the third quarter. Historically, investors fled from emerging markets during times of global uncertainty. But this time, investors seem to be favoring stock funds that invest primarily outside of the United States. In the third quarter, emerging markets funds returned 19 percent, on average, while international stock funds were up 16 percent, on average. Both categories handily beat U.S. stock funds, which gained only 12 percent over the same time period, according to MarketWatch. The biggest surprise of the third quarter may have been the stellar performance of stock funds that invest in Europe. Even amid sovereign debt concerns there, the category still returned 18.6 percent, on average. For more of the best performing asset classes year-to-date, check out Morningstar's category returns page.
[See Why Emerging Markets Belong in Your Portfolio from U.S. News.]
The Wall Street Journal is warning investors of a potential bubble in the bond market. Retail investors poured more than $375 billion into bond funds last year and another $230 billion so far in 2010, according to the WSJ. Columnist Jason Zweig points out that most of this money is now in shorter-term bond funds as investors have pulled nearly $500 billion out of money market funds so far in 2010. The fund flows seem to show that investors have been dumping money market funds because of their low yields in favor of short-term bond funds, which are inherently riskier. Zweig cautions investors: "A typical short-term fund stands to lose about 3 percent if interest rates rise 1 percentage point."
[For more investing insights, see U.S. News's The Smarter Investor blog.]
If you're not sure what to do when rates rise, check out the WSJ's latest advice on how to play rising interest rates. The Journal recommends that investors move their bond money into cash (or other short-term bond investments), floating rate bonds, convertibles, high-yield debt, dividend-paying stocks, treasury inflation-protected securities, and commodities.
[See U.S. News's When Investors Fail, This Is a Reason Why.]