Amid lingering concerns about slowing global economic growth,
one of the 2012's most prominent ETF themes has the potential to
keep thriving in 2013. That theme being the
soaring popularity of emerging markets local
currency bond ETFs
such as the Market Vectors Emerging Markets Local Currency Bond ETF
), iShares Emerging Markets Local Currency Bond Fund (NYSE:
) and the actively managed WisdomTree Emerging Markets Local Debt
) were home to impressive gains in assets under management last
year as investors sought out the stronger currencies and government
balance sheets offered by some developing markets.
Those funds are diverse at the country and region levels. For
example, ELD, which has over $1.6 billion in AUM making it the
second-largest actively managed ETF on the market today, spreads
its country allocations between Asia, Africa, Europe, Latin America
and the Middle East. In 2013, some investors may want to consider a
more focused bet on bonds issued in local emerging markets
"As investors adjust their portfolios to account for potentially
lower levels of output growth in 2013, many might consider a
greater allocation to countries that, as a region, are currently
growing at the fastest pace globally,"
said WisdomTree Portfolio Manager Rick Harper
in a research note.
Harper continued: "After a year that has seen modest regional
currency underperformance compared to Emerging Europe and Latin
America due to concerns about a prolonged slowdown in China, 2013
could provide a positive backdrop for Asian outperformance as
investors shrug off earlier economic concerns. When focusing on
fundamentals, we believe the prospects for Asia are indeed some of
the brightest across the developed as well as the emerging
Investors can easily tap into the theme of strong Asian
currencies through the WisdomTree Asia Local Debt Fund (NYSE:
). ALD, which will celebrate its second birthday in March, is home
to $458 million in AUM. That makes it one of the largest actively
Importantly, ALD has gained about 7.3 percent in the past year
and the fund pays a monthly dividend, adding to its allure for
income investors looking for some non-dollar or international
More importantly are the facts that ALD's constituent currencies
are arguably undervalued and carry higher interest rates than what
can be found in much of the developed world.
"Currently, interest rates are approximately three times higher
in Asia than in many developed markets (providing a distinct carry
advantage)," said Harper. "While higher interest rates have
attracted some investors, these countries' projected growth rates
lead many economists to call for continued appreciation of their
currencies against the U.S. dollar. On average, currencies in ALD
are undervalued compared to their long-term purchasing power by
With expectations firmly in place for the Federal Reserve, the
Bank of Japan and other developed market central banks to continue
engaging currency-depressing easing programs, higher-yielding Asian
currencies become all the more attractive.
Regarding ALD, the ETF is not as risky either at the credit
level or the country level as some investors may think. With
Singapore, Australia and New Zealand combing for almost 28 percent
of ALD's weight, the fund offers significant developed markets
exposure. At the credit level, roughly two-thirds of the fund's
holdings are rated AAA, AA or A.
Other country weights include South Korea, Thailand, Malaysia,
Indonesia, the Philippines, China, Taiwan and Hong Kong.
For more on local currency bond ETFs, click
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