Following a 2012 that saw a batch of solid returns for
emerging markets bond
denominated in local currencies, this sub-sector the
exchange-traded products universe has seen tepid performances to
However, with investors and money managers still looking for
ways to boost portfolio income, emerging markets local currency
debt could deliver upside as this year progresses.
As most investors know, U.S. Treasuries and high-grade
corporates offer minimal income potential, but the same cannot be
said of emerging markets local currency bond ETFs. For example,
the WisdomTree Emerging Markets Local Debt Fund (NYSE:
) has a 30-day SEC yield of 3.77 percent.
Conversely, the 30-day SEC yield on the iShares Barclays TIPS
Bond Fund (NYSE:
is negative 4.17
At the end of January, ELD had a yield to maturity of 4.59
percent and a duration of of 4.84 years. The comparable five-year
U.S. Treasury Note has a comparable duration of 4.8 years.
Duration is the measure of a bond's sensitivity to interest rate
With over $1.8 billion in assets under management, ELD is
coming off its best calendar year performance since inception in
2010, according to WisdomTree. Not to mention, ELD, the
second-largest actively managed ETF, has been an impressive
gather of assets in recent months. As recently as early in the
fourth quarter of 2012, ELD had just over $1 billion in
Soaring to $1.8 billion in just a few months is undoubtedly
impressive and there are reasons why investors continue to
embrace this asset class.
"In fact, emerging market local debt as an asset class had
better returns than even high-yield debt in 2012 thanks to
aggressive interest rate cuts by many EM central banks," said
WisdomTree Portfolio Manager Rick Harper in a note. "While the
future path of U.S. fixed income may be subject to debate, we
believe investors should also be focusing on the potential
drivers of return in international fixed income and emerging
markets when making portfolio allocation decisions."
Those potential drivers of returns to emerging markets debt in
2013 include the possibility that
select developing world currencies are poised to
against the U.S. dollar this year and the thesis that some
emerging markets could earn higher credit ratings.
Additionally, as Harper previously noted, developing world
central banks are largely on hold with regards to interest rate
cuts. That removes an obvious hurdle to currency appreciation in
"With less central bank activity, we believe interest rates in
emerging market government debt will remain near current levels
said Harper in the note
While noting that ELD's returns since inception have been
hampered by currency performance, Harper believes in the
long-term prospects for emerging markets currencies.
"The rationale behind this belief is that as these countries
continue to grow at faster rates than the U.S., there may be a
bias for the currency to appreciate against the U.S. dollar.
Eventually, as these countries transition from export-driven
economies to more consumer-based ones, an appreciating currency
will benefit as they import more products from abroad," he
ELD offers exposure to 15 countries with Mexico, Indonesia and
Malaysia each receiving allocations of more than 10 percent.
Brazil, Russia and Thailand are also include among the top-10
The ETF is also worth considering for investors looking to
profit from possible ratings upgrades. At least three of ELD's
country holdings - Colombia, Turkey and the Philippines - have
the potential to be on the receiving end of favorable ratings
agency news this year.
For more on emerging markets bonds, click
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advice. All rights reserved.
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