Emerging markets sovereign bonds denominated in local
currencies have proven to be a popular destination for ETF
investors looking for diversity and better yields beyond U.S.
Treasuries. Those investors now have another ETF to choose from
with Thursday's debut of the PowerShares Fundamental Emerging
Markets Local Debt Portfolio (
The new PowerShares offering will compete directly with at
least three other
, which have over $4 billion in assets under management combined.
The actively managed WisdomTree Emerging Markets Local Debt Fund
) is the largest multi-region local currency emerging markets
bond ETF with $2.06 billion in assets under management.
With the PowerShares Fundamental Emerging Markets Local Debt
Portfolio entering a corner of the ETF market
littered with established competition
, the new fund needs to offer something to stand apart from its
rivals. PFEM does that by tracking a fundamentally-weighted index
provided by Research Affiliates, one of the pioneers of
"Traditional bond indexes generally use some form of
market-cap weighting where constituent weights are a function of
both the amount of debt issued and the debt's current price. This
approach can result in greater weights being assigned to issuers
that have issued more debt. In contrast, the Fundamental Index
approach developed by Research Affiliates, LLC weights bonds
based on each country's economic footprint, resulting in a
portfolio that is correlated to a country's debt service
capacity," said PowerShares in a statement.
PFEM, which has an annual expense ratio of 0.5 percent, tracks
the Citi RAFI Bonds Sovereign Emerging Markets Extended Local
Currency Index. To qualify for the Index, countries must have at
least a minimum domestic sovereign debt rating of "CC" by S&P
and "Ca" by Moody's. Research Affiliates, LLC and Citigroup Index
LLC jointly select the emerging market countries in the Index and
country weights are determined once per year based on the RAFI
methodology, according to the statement. The index and the ETF
are rebalanced quarterly.
As of April 30, the index included bonds issued by the
governments of Brazil, Chile, China (Offshore), Colombia, the
Czech Republic, Hungary, Indonesia, Israel, Malaysia, Mexico,
Peru, the Philippines, Poland, Russia, South Africa, South Korea,
Thailand and Turkey. The ETF's top-five country weights are
Russia, Brazil, Indonesia, Mexico and Malaysia,
according to PowerShares data
The Philippines, Chile, Peru and South Africa also receive
weights of just over five percent. Thailand just misses the five
percent mark with an allocation of 4.99 percent.
PFEM features an average yield to maturity and yield to worst
of 5.07 percent. The new ETF's modified duration is 5.5
In terms of credit quality, 45 percent of PFEM's 38 holdings
are rated A by Standard & Poor's. Another 13 percent are
rated AA and 23 percent are rated BBB. Five percent of the ETF's
holdings are not yet rated by S&P.
PowerShares offers other fundamentally-weighted bond ETFs
including the $813.7 million PowerShares Fundamental High Yield
Corporate Bond Portfolio (NYSE:
) and the PowerShares Fundamental Investment Grade Corporate Bond
For more on ETFs, click
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