When it comes to emerging markets
, knowing what countries are left out of or only have minimal
exposure in a particular fund is often as important as knowing
what nations dominate that ETF.
At the equity level, ETFs with sizable weightings
to the largest emerging markets
have disappointed investors this year.
On the other hand, Indonesia and the Philippines, among
others, have been sturdy performers while BRIC, South Africa and
South Korea have wilted. Investors should apply a similar logic
when it comes to bond ETFs because some funds indicate that what
countries are excluded can be nearly as important as those that
That is the case with the WisdomTree Emerging Markets Local
Debt Fund (NYSE:
). The WisdomTree Emerging Markets Local Debt Fund is the
second-largest actively managed ETF on the market today and was
the first to cross the much ballyhooed $1 billion in assets under
Few in the mainstream financial media either know that ELD is
actively managed or that it is big because
the powers that be opt to focus on just one
actively managed ETF
Since its debut in August 2010, ELD has returned just over 17
percent, a stout number and one that indicates active management
is working here. Consider the case of Hungary. The volatile
Eastern European nation accounts for nearly five percent of ELD's
benchmark index, but the ETF makes no room for the financially
"Recently, the ratings agency Standard & Poor's announced
that it was joining Moody's in lowering the outlook for Hungary's
sovereign credit rating," said WisdomTree portfolio manager Rick
Harper in a new research note. "ELD's portfolio management team
has excluded Hungary from the portfolio ever since the Fund's
inception for many of the same reasons discussed in the S&P
report. Principally, we are concerned about the uncertainty of
future action by government policy makers. After a breakdown in
negotiations with the International Monetary Fund (
) disappointed markets last year, we remain skeptical about the
path of governmental reform we believe is required to help
improve Hungary's economy."
ELD's credit profile indicates investors are not taking on
significantly higher credit risk with this ETF. About 61 percent
of the ETF's holdings are rated A and BBB. Another 16.2 percent
are rated either AAA or AA. Additionally, ELD offers ample
exposure to developing markets that could soon be on the
receiving end of higher credit ratings
For example, ELD has a 3.72 percent weight to the Philippines,
recently promoted to investment-grade status
. Last month, Standard & Poor's said it could boost Peru's
according to the Wall Street Journal
. The Andean nation represents 3.43 percent of ELD's weight.
Indonesia, Turkey and Colombia are all credible candidates for
higher credit ratings and those countries combine for over 20
percent of ELD's weight. Indonesia is the ETF's third-largest
country allocation at 10.33 percent.
Again, sometimes what countries are excluded in an emerging
markets bond ETF are just as important those that are include.
Hungary proves the point.
"Currently, Hungary is rated BB (two notches below investment
grade) by S&P, on par with borrowers such as Portugal and
said Harper in the note
. "S&P notes that the government's predictability and
credibility has continued to weaken in the past year. Questions
about central bank independence, a large percentage of debt held
by foreign investors, and a banking system with large foreign
liabilities pose significant risks, in our opinion."
ELD has a 30-day SEC yield of 3.91 percent and an effective
duration of 4.87 years. The average yield to maturity on the ETF
is 4.57 percent. ELD, which has an expense ratio of 0.55 percent,
now has $1.9 billion in assets under management, up from $1.6
billion in early January.
For more on emerging markets bond ETFs, click
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