The amount of institutional money flowing into emerging market
debt ETFs is quite large, while the amount of retail investment
money is not as large but growing. For investors struggling with
extremely low interest rates, emerging markets provide a
compelling opportunity to obtain higher yields while diversifying
your portfolio.
The menu of emerging market debt ETFs is also growing. Two
newer emerging market debt ETFs
are the iShares JPMorgan USD Emerging Markets Bond Fund (
EMB
,
quote
) and the PowerShares Emerging Markets Sovereign Debt Portfolio (
PCY
,
quote
). There are several other debt ETFs for emerging markets but for
this article we will profile three.
In addition to EMB, iShares also has the iShares Emerging
Markets Local Currency Bond Fund (
LEMB
,
quote
) which seeks "investment results that correspond generally to
the price and yield performance, before fees and expenses, of the
Barclays Emerging Markets Broad Local Currency Bond Index". The
essential difference between the LEMB and EMB debt ETFs is that
they track different indexes. EMB tracks the J.P. Morgan EMBISM
Global Core Index while LEMB tracks the Barclays Emerging Markets
Broad Local Currency Bond Index. The breakdown of the country
allocation for LEMB follows.
South Korea 21.00%
Brazil 11.86%
Mexico 7.71%
Poland 6.09%
Russia 4.47%
South Africa 4.45%
Czech Rep. 4.38%
Turkey 4.38%
Colombia 4.27%
Other 28.22%
This is in contrast to EMB which has Brazil, Mexico, Russia,
Turkey and the Philippines as its top five country allocations.
LEMB has a current yield of 4.27% which is a bit lower than EMB's
4.46%. LEMB also trades less frequently with a 90-day average
volume of 37,000 shares per day, compared with EMB which averages
over 700,000 shares per day.
Market Vectors also has a local debt fund -- the Market
Vectors Emerging Markets Local Currency Bond ETF (
EMLC
,
quote
) which "seeks to replicate as closely as possible, before fees
and expenses, the price and yield performance of the J.P. Morgan
GBI-EMG Core Index". The fund's country allocation follows:
Poland 10.07%
Malaysia 9.56%
South Africa 9.33%
Turkey 9.10%
Brazil 9.01%
Indonesia 8.82%
Thailand 6.00%
Mexico 5.31%
Supranational 5.05%
Hungary 4.68%
EMLC has a current yield of 4.59% and averages more than
300,000 shares per day. These two statistics gives EMLC an
advantage over LEMB, as you will receive a higher yield and have
more liquidity, just in case you need to sell out fast.
WisdomTree is an ETF producer that has focused on dividend
oriented funds since its inception; it also has an emerging
markets local debt fund. According to its website, the WisdomTree
Emerging Markets Local Debt Fund (
ELD
,
quote
) seeks "a high level of total returns consisting of both income
and capital appreciation. The fund attempts to achieve its
investment objective through investment in local debt denominated
in the currencies of emerging market countries". The fund's
country allocation follows:
Mexico 10.36%
Malaysia 10.27%
Indonesia 10.17%
Brazil 10.13%
Poland 7.14%
South Africa 7.14%
Turkey 6.99%
South Korea 6.92%
Russia 6.89%
Thailand 6.75%
Philippines 3.57%
Chile 3.48%
Colombia 3.44%
Peru 3.44%
China 3.24%
Unfortunately for this fund its yield is less than the others,
coming in at 3.59%. The fund's 90-day average volume is a little
under 200,000 shares per day which is decent liquidity.
In some ways these three debt ETFs aren't very different. They
do have slightly different country allocations, with each having
different top holdings: South Korea, Poland, or Mexico. Obviously
the complete lists of countries held by the respective funds have
great similarities, which makes selecting one a challenge.
Unless you are very certain about the countries you want
exposure to, in which case the country allocation will suffice,
it's probably wise to choose a fund based upon yield and
liquidity. These funds are quite young (EMLC is the oldest at two
years old) and therefore it is difficult to compare based upon
total return history.
Given the yields we see here, and going back to Emerging
Money's previous profiling of EMB and PCY, I would likely invest
in PCY as my primary emerging market debt instrument. It has both
the highest yield at 4.86%, and the highest trading volume,
averaging close to 850,000 shares per day. I could possibly pair
that fund with one of these, in which case I would probably use
EMLC, as it has a different country allocation to PCY as well as
the highest yield and the most trading volume of the three debt
ETFs.
As time goes by expect these debt ETFs to trade more
frequently, with more and more investors adding emerging market
debt to their portfolios. Also expect to see more specific debt
funds introduced, with regional and country-specific orientations
just like the many emerging market equity ETFs. In the meantime,
these debt ETFs will do just fine.