Investing in emerging markets has become a little dicey at
present, largely thanks to taper concerns in the U.S. market.
However, after a rough patch in 2013, most emerging market funds
seem to have stabilized to start this year, and especially so in
the bond space.
Amid such a backdrop, EGShares
with three new funds in the emerging market (EM) bond space across
the duration spectrum in association with mutual fund provider TCW.
These include the following funds, all of which hit the market on
EGShares TCW EM Short Term Investment Grade Bond ETF-
SEMF, EGShares TCW EM Intermediate Term Investment Grade
Bond ETF- IEMF
EGShares TCW EM Long Term Investment Grade Bond ETF-
SEMF, IEMF & LEMF in Focus
These new passively managed ETFs look to track the J.P. Morgan
Custom EM short-term, medium-term and long-term Investment Grade
Bond Indexes. Each of the funds charges 65 bps in fees which is a
bit costlier, though still in line, in the EM bond space.
All of these funds are of high credit quality and denominated in
U.S. dollars. The fund may invest only 20% of assets in
non-investment grade debt securities. The ETFs will have exposure
in both sovereign and corporate bonds.
The distinction lies in the maturity period and number of holdings.
For SEMF, the index is exposed to 48 emerging markets bonds with
maturities between 1 and 3 years.
For IEMF, the index comprises 118 EM investment grade sovereign and
corporate bonds with outstanding maturities between 4 and 7 years
while LEMF seeks to match up the performance 121 EM bonds with a
targeted total duration exposure between 8 and 12 years (read:
5 ETF Predictions for 2014
Each fund will cap the exposure of a single country to 20% of the
total assets. Countries likely to rule the fund are Brazil, Chile,
China, Colombia, Czech Republic, Hungary, India, Indonesia,
Malaysia, Mexico, Peru, the Philippines, Poland, Russia, South
Africa, Thailand and Turkey.
How do these fit in a portfolio?
For investors who remain yield-starved in a rock-bottom interest
rate environment in the developed nations, but are still looking
for a fixed-income play, these EM products might be enticing
Though a modest QE tapering is slated for this month and more of it
is probably in the cards, the Fed has vowed to keep the interest
rate low for longer. And if the Fed succeeds in accomplishing this
goal, U.S. Treasury bond yields will remain low even after the
taper is executed (read:
3 Bond ETFs Popular in the 'No Taper' Aftermath
Let's consider the bear-case scenario as well. If the U.S. treasury
yield starts rising (which is happening at present), it will still
remain low compared to emerging market bond yields.
Moreover, emerging market equities will remain out of favor in 2014
due to the lack of cheap money. Historically noticed, that bonds
remain have been less volatile than equities. Thus, EM bonds look
better-placed than their equities cousins in 2014.
The return profile validates the fact. While broader emerging
market equity ETFs
iShares MSCI Emerging Markets
Vanguard FTSE Emerging Markets ETF
) lost respectively 3.98% and 4.08% in the last one month, bond
iShares JPMorgan USD Emerging Markets Bond Fund (
PowerShares Emerging Markets Sovereign Debt Portfolio
gained, respectively, 1.30% and 2.16%.
Lastly, through these new-launched funds, investors can resort to
higher yields while not being open to default risk. In most cases,
yield-seeking investors have to bear the pain of poor credit
quality of the underlying assets in the fixed-income market.
Additionally, since these funds are zeroing in on
dollar-denominated bonds, there is little cause for concern if the
foreign currencies tumble against the dollar (read:
3 Currency ETFs Crushed in Emerging Market Rout
The space is still under-tapped with
WisdomTree Emerging Markets Local Debt Fund (
topping the list of highest AUM gatherers. However, the newly
launched ETFs presumably will not face much trouble in obtaining
In fact, the third biggest fund, ELD, has exposure in local
currency making it a bit risky option in the current environment.
Plus, very few bond funds currently offer exact duration exposure,
setting these apart.
herefore, in order to show up in the space, SEMF, IEMF and LEMF
will have to promote their targeted duration, investment grade and
currency exposure, which will set the trio apart from most of the
other products in this still small space.
Want the latest recommendations from Zacks Investment Research?
Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
WISDMTR-EM LDF (ELD): ETF Research Reports
ISHARS-JPM EM B (EMB): ETF Research Reports
PWRSH-EM SVN DP (PCY): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for the
Next 30 Days. Click to get this free report