Japanese policymakers seem to be determined to pull the
country out of the deflationary spiral. In the last few months,
they have taken many aggressive measures to weaken the currency
and stoke inflation, in order to reinvigorate the ailing
Recently the Bank of Japan announced another round of
unprecedented monetary easing measures-doubling its monthly debt
purchases to about 7 trillion Yen and also lengthening the
average maturity of its holdings to seven years from three years.
DXJ-Best ETF to play the Japan Rally
With the BOJ buying about 70% of JGBs issued every month and
driving yields to ultra-level levels, Japanese institutions such
as pension funds, banks and life insurance companies will be
forced to invest in other assets that have similar risk but
Japanese institutions generally prefer government bonds to
riskier assets like stocks. Historically these institutions have
been heavily invested in domestic bonds but recently they have
been increasing their international holdings in search for yield
and currency appreciation.
estimates, Japanese institutions' purchases of international
bonds could be close to a trillion dollars this year. German
Bunds, French Oats and emerging markets government bonds are
expected to benefit from these fund flows. (Read:
3 sector ETFs Surviving This Slump
Among these, emerging markets sovereign bonds already have a
strong investment case. Yield levels are still quite attractive
in these countries and many central banks have the flexibility to
cut interest rates further to stimulate growth, which would
result in price appreciation.
On the other hand, yields on German and French sovereign debt
are already at very low levels, leaving little scope for price
Many emerging countries now have better fiscal health and
lower debt levels than their developed counterparts. Healthy
emerging economies also have adequate levels of foreign exchange
reserves and deep and liquid financial markets. Credit quality
and liquidity in emerging market debt have been improving over
the past few years. (Read:
MLP ETFs for Growth and Income
Among emerging countries, Japanese investors have been showing
a preference for sovereign debt of countries like Indonesia,
Philippines, Turkey, Mexico and Brazil. Emerging Markets
are set to benefit from massive fund flows from Japan.
Among the ETF plays available--investors can choose between
the debt issued by the governments in US Dollars or in local
We may add that in general, emerging market currencies are
more volatile than the U.S. Dollar and in times of global
economic turmoil, the Dollar benefits from its "safe haven"
However, in the longer-term, the currencies of healthy
developing economies are likely to outperform the Dollar.
In addition to greater return potential in the long-term,
local currency denominated debt ETFs are less sensitive to
interest rate changes compared with USD denominated debt ETFs due
to their shorter duration (4-5 years) compared with the duration
of two USD denominated emerging market debt ETFs (7-9 years).
Further, they provide greater diversification benefits.
PowerShares Emerging Markets Sovereign Debt (
PCY is based on the DB Emerging Market USD Liquid Balanced
Index, which tracks liquid emerging markets U.S.
dollar-denominated government bonds issued by 22 emerging-market
Launched in November 2007, the product has already attracted
more than $2.6 billion in assets.
It charges the investors 50 basis points in annual expenses and
currently pays out a yield of 4.63%. Mexico, Indonesia, Brazil
and Philippines are among the top countries allocations.
About 57% of the fund's 67 holdings are currently investment
grade rated. Effective duration of the fund is 9.51 years while
Yield to maturity is 4.26%. This fund is suitable for investors
who do not want short-term currency related fluctuations in their
WisdomTree Emerging Markets Local Debt Fund (
ELD is actively managed and thus does not track a specific
benchmark. Currently 83.1% of the assets are invested in
sovereign bonds and 14.3% in supranational bonds.
The fund has more than $1.9 billion in AUM as of now. Current
SEC yield is 3.82% while the expense ratio is 55 basis points per
Mexico, Malaysia, Indonesia and Brazil occupy the top spots in
terms of country exposure.
Effective duration of the fund is 4.83 years and its Yield to
maturity is 4.47%. About 78% of the bonds are rated BBB or higher
(investment grade rating).
Market Vectors EM Local Currency Bond ETF (
EMLC tracks JP Morgan GBI-EMG Core Index that provides direct
exposure to local currency bonds issued by emerging market
governments. The fund pays out dividends on a monthly basis.
The ETF holds 213 securities, with an average modified
duration of 4.99 years and average Yield to maturity of 5.15
In terms of country exposure, Poland, Malaysia, South Africa
and Brazil occupy the top spots.
The ETF charges expense ratio of 47 basis points, while the 12
month yield is 4.04% currently. 54.1% of the index holdings are
rated investment grade by S&P.
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WISDMTR-EM LDF (ELD): ETF Research Reports
MKT VEC-EMG MKT (EMLC): ETF Research Reports
PWRSH-EM SVN DP (PCY): ETF Research Reports
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