Bond ETFs are expected to drive asset growth for
exchange-traded products in the coming years. By some estimates,
bond ETFs could have $2 trillion in assets under management by
2020. This year, bond ETFs have accounted for nearly a third of
all inflows to exchange-traded products.
However, it is not just standard fare such as U.S. Treasuries
or investment-grade corporates that are driving bond ETF asset
growth. Amid anemic interest rates in the U.S., declining credit
quality for some European sovereign issuers and improving credit
quality in the developing world, emerging markets bond ETFs are
attracting robust inflows in 2012.
That is not surprising given the decent yields that can be
found on even some of the more conservative emerging markets bond
ETFs. The iShares J.P. Morgan USD Emerging Markets Bond Fund
), the largest such ETF with $6.1 billion in AUM, has a trailing
12-month yield of 4.3 percent. The PowerShares Emerging Markets
Sovereign Debt Portfolio (NYSE:
), EMB's primary rival, has a trailing 12-month yield of 4.7
percent. Both ETF hold dollar-denominated debt.
Year-to-date, EMB and PCY have easily outpaced more
conservative bond funds such as the PIMCO Total Return ETF (NYSE:
), the Vanguard Total Bond Market ETF (NYSE:
) and the iShares Core Total U.S. Bond Market ETF (NYSE:
) by wide margins.
As of July, emerging markets bond ETFs accounted for $15.5
billion of the assets in global fixed income exchange-traded
according to iShares data
The category has taken in over $6bn in net new assets already
in 2012 and now accounts for 5% of the fixed income ETP universe,
up from less than 2% going into 2010, according to a note by Dodd
Kittsley, Head of Global ETP Market Trends Research for BlackRock
). BlackRock is the parent company of iShares.
ETF issuers have met investor demand for more emerging markets
debt products with aplomg. As Kittsley noted, roughly 20 percent
of the 57 emerging markets bond ETPs on the market debuted this
year. These new funds offer more exposure to more than just
dollar-denominated sovereigns and many are proving successful
despite narrower focuses.
Take the example of the WisdomTree Emerging Markets Corporate
Bond Fund (NASDAQ:
). EMCB debuted in March as the first ETF offering exposure to
emerging markets corporate bonds. Today, EMCB has almost $88
million in AUM. The fund has proven so successful that it sparked
copy cat funds from both iShares and State Street
Emerging markets corporate debt has been one of the fast
growing corners of the bond space over the past several years. As
of May, all emerging markets corporate debt, including high-yield
issues, had a total market value of $1 trillion, putting it on
par with the U.S. junk bond market, according to Barclays.
improving credit ratings
, strong government balance sheets and diminishing default risk,
many investors have looked to bond ETFs denominated in local
currencies as a way of hedging exposure to dollar-denominated
These inflow statistics indicate investors are not shy about
embracing bonds denominated in Chilean pesos and the Thai baht.
In early May, the Market Vectors Emerging Markets Local Currency
Bond ETF (NYSE:
) had $743 million in AUM. As of October 26, that number was
almost $927 million. The iShares Emerging Markets Local Currency
Bond Fund (NYSE:
) is just over a year old and already has more than $207 million
in AUM. The WisdomTree Emerging Markets Local Debt Fund (NYSE:
), the first actively managed ETF to hit the $1 billion AUM mark,
had $1.1 billion in AUM at the end of 2011, but that number is
now close to $1.4 billion.
These statistics indicate investors are shaking off
preconceived notions about emerging markets debt and realizing
the asset class is not risky as previously believed. A vast
majority of the issues held in the ETFs mentioned here are
investment grade, adding to the allure for investors.
Another advantage for investors is low correlations. Over the
past three years, PCY has a correlation to the S&P 500 of
just 0.68. Over that time, including dividends paid, PCY has
slightly outperformed the SPDR S&P 500 (NYSE:
) with significantly less volatility.
For more on emerging markets bond ETFs, click
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.