With the U.S. Treasury bonds now at ultra-low yield levels, the
investors are looking at alternate sources of income from their
investment portfolios. One asset class which has attracted a lot of
investors' interest recently is emerging markets debt, as it
provides an opportunity to earn much higher yields with capital
appreciation, while adding diversification benefits to the
As a result of growing interest in this asset class, there are
currently many ETFs available that provide exposure to different
classes of debt issued in emerging markets. (Read: Forget
T-Bonds, Invest in These Top Corporate Bond
The investors can choose between the debt issued by the
governments or the corporates or between debt issued in US Dollars
or in local currencies.
The case of investing in emerging markets sovereign debt seems
to be pretty strong now. 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.
Thus the chances of sovereign default are extremely low.
Further, while interest rates are at rock-bottom levels in the
U.S. and can only go up from the current levels, the rates in
emerging countries are still high. The central banks in many of
these countries were raising rates till last year but reversed the
monetary cycle later last year or earlier this year, as the growth
slowed and inflation came within their acceptable range.
With inflation reigned in, these central banks now have more
flexibility to cut rates further, in order to support growth. As
the fixed income instruments appreciate when the interest rates go
down, the investors investing in the emerging markets sovereign
debt have better chances of capital appreciation. (Read:
Three Excellent Dividend ETFs for Safety and
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" status.
However, in the longer-term, the currencies of healthy
developing economies are likely to outperform the Dollar.
For investors who do not want short-term currency related
fluctuations in their portfolio, US dollar denominated bond ETFs
P. Morgan USD Emerging Markets Bond Fund
PowerShares Emerging Markets Sovereign Debt
)are the better options. Please read:
Top Two Emerging Market USD Bond ETFs
) on these ETFs.
However, investors looking for true diversification in their
portfolios and higher longer-term return should consider investing
in emerging markets local currency bond ETFs.
In addition to greater return potential in the long-term, these
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).
Below we have analyzed four ETFs that invest in the debt issued
by the emerging markets governments in their local currencies.
Can You Beat These High Dividend ETFs?)
WisdomTree Emerging Markets Local Debt Fund (
ELD does not track a specific benchmark, but seeks a high level
of total return consisting of both income and capital appreciation
by investing in emerging market local debt. Currently 83.1% of the
assets are invested in sovereign bonds and 14.3% in supranational
The fund has more than $1.2 billion in AUM as of now. The fund
has 90 holdings with average years to maturity of 5.1 years and an
effective duration of 4.4 years. Current SEC yield is 4.27% while
the expense ratio is 55 basis points per annum.
Mexico (10.6%), Indonesia (10.3%), Malaysia (10.2%) and Brazil
(10.0%) are the top countries in terms of exposure. About 78% of
the bonds are rated BBB or higher (investment grade rating).
ELD has returned 6.3% year-to-date.
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 and
capital gains annually. The fund holds 184 securities, with
an average modified duration of 5.0 years and average years to
maturity of 7.5 years.
In terms of country exposure, Poland (10.1%), Malaysia (9.6%),
South Africa (9.3%) and Brazil (9.0%) occupy the top spots. The
fund was launched in July 2010 and now has $746.9 million in
The ETF charges expense ratio of 49 basis points, while the 30
day SEC yield is 5.4% currently. 54.1% of the index holdings are
rated investment grade by S&P. EMLC has returned 8.6%
SPDR Barclays Capital Emerging Markets Local Bond ETF (
EBND tracks Barclays Capital EM Local Currency Government
Diversified Index, which is designed to measure the performance of
fixed rate local currency sovereign debt of emerging market
countries, having remaining maturity of one year or more and rated
B- or higher. 30 days SEC yield is 4.94% currently.
Average maturity of its 234 holdings is 6.6 years, while the
modified adjusted duration is 4.8 years. South Korea (12.3%) and
Brazil (12.1%) followed by Mexico (8.7%) and Poland (6.2%). EBND
has returned 7.0% in 2012.
iShares Emerging Markets Local Currency Bond Fund (
LEMB tracks the Barclays Emerging Markets Broad Local Currency
Bond Index, which is designed to track emerging market sovereign
debt, issued in local currencies.
The fund which made its debut in October 2011 has attracted AUM
of $50.5 million so far, invested in 47 holdings. The expense ratio
is 60 basis points while the 30 days SEC yield is 4.62%
currently. The credit rating is BBB- per S&P Ratings.
South Korea (22%), Brazil (13%) and Mexico (8%) occupy the top
spots in terms of country exposure. The ETF has gone up 2.5%
(): ETF Research Reports
SPDR-BC CAP EM (EBND): ETF Research Reports
WISDMTR-EM LDF (ELD): ETF Research Reports
ISHARS-JPM EM B (EMB): ETF Research Reports
MKT VEC-EMG MKT (EMLC): ETF Research Reports
ISHARS-EM LCBF (LEMB): ETF Research Reports
PWRSH-EM SVN DP (PCY): ETF Research Reports
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