When it comes to investing in bond
, one of the most important factors investors can (and should
evaluate) is the credit quality of the fund's holdings. Arguably,
credit quality takes on added importance when analyzing ETFs that
offer exposure to emerging markets debt.
In the years immediately following events such as Asian debt
crisis of the late 1990s, Russia default crisis in 1998 and
Argentina's sovereign default in 2001, conventional wisdom held
that bond investors faced increased credit risk in the emerging
world. That is not necessarily the case anymore as plenty of
or either poised to see higher credit ratings
or have recently been on the receiving end of upgrades.
As was widely expected, the Philippines
recently joined the investment-grade club
when Fitch long-term, foreign currency-denominated debt to BBB-
from BB and the long-term local currency-denominated debt to BBB
from BBB- with stable outlooks on both ratings.
As WisdomTree Portfolio Manager Rick Harper notes, on the same
day, Standard & Poor's upgraded Turkey's local currency debt
to BBB, which is the second-lowest investment-grade rating.
"While this represents an important milestone for the
Philippines, we believe it also serves as positive reinforcement
for our focus on fundamentals when investing in emerging
said Harper in a research note
. In uncertain or developing markets, biasing a portfolio toward
stronger economic fundamentals could be a prudent way of reducing
risk. In its report, Fitch noted that the impressive gross
domestic product (
) growth of 6.6% in 20123 and a projected expansion of 5.5% in
20134 make the economy all the more attractive, given its
comparatively low debt burden."
At the end of last year, S&P raised its outlook on the
Philippines to positive, citing the positive impact of policies
set forth by President Benigno Aquino.
The investment-grade rating for the Philippines has been good
news for the WisdomTree Emerging Markets Local Debt Fund (NYSE:
) and the WisdomTree Asia Local Debt Fund (NYSE:
). The two actively managed ETFs hold allocations to the
Philippines of 3.72 percent and 5.73 percent, respectively. ELD,
which is the second-largest actively managed ETF on the market
today with over $1.9 billion in assets under management, also
features a seven percent weight to Turkey.
Following the Philippines and Turkey news, all of 15 of the
countries featured in ELD have an investment-grade rating by at
least on major ratings agency for the first time since the ETF
debuted in August 2010, said Harper. Same goes for ALD. All 12 of
the countries in that ETF now have investment-grade ratings from
at least one of the major ratings agencies.
In the case of ELD, the diminished credit risk
highlights the strong fundamentals surrounding
. Nearly half the ETF's holdings are rated either, AAA, AA or
ELD's effective duration is 4.86 years, which is slightly
lower than the 5.05 years seen on the rival Market Vectors
Emerging Markets Local Currency Bond ETF (NYSE:
). Mexico, Malaysia, Indonesia and Brazil combine for nearly 42
percent of ELD's weight. The Mexico exposure is significant
investors have shown a robust appetite for
Mexican debt in recent months
For its part, ALD is not a pure emerging markets plays. In
fact, the $547 million ETF offers ample developed market exposure
and that means over 62 percent of its holdings are rated AAA, AA
or A. With ALD investors get the benefit of exposure to AAA-rated
Australia, Hong Kong and Singapore along with the solid yields
offered by AA-rated New Zealand. Those four countries combine for
about 29 percent of ALD's weight, though Thailand is ALD's
largest country weight at 11.87 percent.
ALD is also attractive regarding sensitivity to interest rate
increases with an effective duration of just 3.52 years,
according to WisdomTree data
. ALD's average yield to maturity is 2.73 percent.
"Ultimately, we are heartened by the progress being made in
many emerging market countries. As investors continue to look for
higher yield potential globally, we believe interest in the asset
class could continue to grow in the coming years," said
For more on emerging markets bonds ETFs, click
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