Emerging markets bonds, even the investment-grade issues,
share a couple of things in common with junk bonds. Of course,
both are prized for yields that are superior to developed markets
government debt. Both were among investors'
most favored bond ETF destinations in 2012
The similarities do not end there. Albeit to a less extent
than U.S. high-yield corporates, emerging markets bonds are
dealing with bubble talk. Plug the phrase "emerging markets bond
bubble" into Google
and nearly 1.7 million results are returned in
less than a third of a second
That does not mean there are no more opportunities with
developing markets debt. Quite the contrary in the eyes of one
Non-dollar denominated issues could represent the
for bond investors this year.
"That is a positive part of the value proposition we today -
emerging markets currencies are not undergoing the same monetary
experiment that could lead to a debasement of the world's reserve
currencies," said Market Vectors portfolio manager Fran
Dollar-denominated emerging markets bond
not only soared in terms of returns last year, two of this
sub-segment's largest funds also surged in popularity with
investors. The PowerShares Markets Sovereign Debt ETF (NYSE:
) is up about 15.3 percent in the past year and has seen its
assets under management total jump
to almost $3.1 billion as of January 18
from $2.5 billion in early November 2012.
The rival iShares J.P. Morgan USD Emerging Markets Bond Fund
) has returned nearly 12 percent in the past year. EMB had $6.2
billion in AUM in early November, but that number is now north of
Amid rampant developed market monetary easing and currency
debasement, this year could be different for dollar-denominated
"The first step for investors is to realize that many
traditional fixed income investments are not likely to deliver
the same types of returns we saw in 2012," said Rodilosso in a
"Although one approach some investors might apply this year is
to add leverage, doing so has often proven to be a perilous
proposition. Instead, I believe the time may be right to consider
emerging markets destinations that offer more attractive yields
on top of currency and credit fundamentals that appear to me to
be on much more solid footing than the U.S. dollar, euro or yen
Rodilosso is the portfolio manager for the popular Market
Vectors Emerging Markets Local Currency Bond ETF (NYSE:
), so some might argue that his preference for non-dollar
developing world bonds should be taken with a grain of salt.
However, there is no denying that ETFs such as EMLC have caught
EMLC, which has a 30-day SEC yield of 4.76 percent, crossed
the $1 billion in AUM mark in the fourth quarter and now has
$1.27 billion in AUM,
according to Market Vectors data
. Importantly, this fund and others like it do not represent
significant increases in credit risk. For example, nearly 60
percent of EMLC's holdings carry investment-grade ratings.
Brazil, Poland, South Africa and Mexico each receive
allocations of 10 percent in EMLC. The ETF has gained almost nine
percent in the past year. Rodilosso noted that the J.P. Morgan
GBI-EMG Core Index (GBIEMCOR), EMLC's underlying index,
rebalanced to include Nigeria at the end of last year. Africa's
largest oil producer now receives a three percent weight in EMLC.
Romania is now eligible for inclusion and Romanian debt will
begin entering the index on March 1st, according to the portfolio
Other local currency funds have proven adept at attracting
investors' cash. The iShares Emerging Markets Local Currency Bond
had $207 million in AUM at the end of October
, but that total now stands at $405.4 million. South Korean and
Brazilian issues combine for 34 percent of LEMB's weight and the
bulk of the fund's 80 holdings garner investment-grade ratings
from Moody's Investors Service.
Even with the soaring inflows to local currency funds,
Rodilosso still sees money managers as under-allocated to the
space and that could spell more upside for these funds this year
as more professional investors warm to the ideas of emerging
markets' significantly lower debt-to-GDP ratios, fiscal deficits
and higher interest rates.
"It is still my belief that global asset managers remain
under-allocated when it comes to local currency emerging markets
debt," he said. "Perhaps this is due to some investors'
tendencies to associate emerging markets in general with past
boom/bust cycles. Add to that the fact that the relative strength
of emerging markets may in itself be something that many
investors are finding difficult to digest, let alone believe in
enough to allocate significant capital, and that may very well be
why we're seeing value remaining in these markets."
Other ETF ideas in the local currency emerging markets space
include the WisdomTree Asia Local Debt ETF (NYSE:
which tracks a region with some of the emerging
best growth prospects for 2013.
Rodilosso also serves as the manager for the MarkVectors
Fallen Angel High Yield Bond ETF (NYSE:
), the Market Vectors Emerging Markets High Yield Bond ETF (NYSE:
) and the Market Vectors Renminbi Bond ETF (NYSE:
), among others.
For more on ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
Gain access to more investing ideas, tools & education.
Get Started on Marketfy, the first ever curated
& verified Marketplace for everything trading.