Ultra-low interest rate environment in the U.S. is forcing the
yield-starved investors to look for alternative sources of
income. One attractive investment option for the investors is the
emerging market debt, which offers much higher yield and lower
interest rate risk, along with capital appreciation
potential.
Currently the emerging markets represent about one-third of
global GDP and their share will continue to grow in the coming
years. The expected growth rate for the emerging economies is
5.6% compared with 1.5% for developed economies, for 2013 per
IMF.
Emerging markets' fundamentals continue to be positive. Many
emerging nations have better fiscal health than the developed
countries. Further they have low correlations with the developed
markets and thus they add diversification benefits to the
portfolio. (Read:
3 ETFs To Prepare For The Fiscal Cliff
)
Additionally, while interest rates are already at rock-bottom
levels in the U.S. and can only go up from the current levels,
the rates in emerging countries are still high. The central banks
in many of these countries were raising rates till last year but
reversed the monetary cycle later last year or earlier this year,
as the growth slowed and inflation came within their acceptable
range.
With inflation reigned in, these central banks now have more
flexibility to cut rates further, in order to support growth.
Thus the investors investing in the emerging markets debt have
better chances of capital appreciation.
As a result of increased interest in this asset class, many
new ETFs targeting this space have been launched recently. The
investors can choose between the debt issued by the governments
or the corporates. (Read:
Obama or Romney? Win with These ETFs
)
In recent years, as the sovereigns are increasing to issue
debt in local currencies, the investors seeking more options in
US dollar denominated emerging markets debt are looking at debt
issued by the corporates. The ETF options currently available in
this space invest only in US dollar denominated debt as the local
currency corporate debt markets in these countries are still
illiquid.
Most of the companies that these ETFs invest in have lower
debt levels as well as lower default rates than many companies in
the developed markets. Further, better demographics in these
countries will ensure longer-term growth potential for these
companies. (Read: T
hree Excellent Dividend ETFs for Safety and
Income
)
WisdomTree Emerging Markets Corporate Bond Fund (
EMCB
)
EMCB-the first ETF in this asset class invests in US dollar
denominated debt issued by public, private or
state-owned/corporations in the emerging market nations in Asia,
Latin America, Eastern Europe, Middle East and Africa.
The ETF has been able to attract more than $60 million in
assets within a few months of its launch. The fund employs a
"top-down" analysis of macroeconomic factors and "bottom-up"
analysis of countries and issuers.
The fund has highest exposure to Oil & Gas sector (35.3%),
followed by Industrials (20.2%) and Metals & Mining (19.5%).
In terms of country exposure Brazil (25.7%), Russia (18.0%) and
Mexico (12.1%) occupy the top three spots. About 75% of the
fund's holdings are investment-grade rated.
iShares Emerging Markets Corporate Bond Fund (
CEMB
)
CEMB tracks the Morningstar Emerging Markets Corporate Bond
Index that represents the performance of US dollar denominated
debt issued by companies in emerging markets.
Brazil (16.9%), South Korea (10.4%) and Mexico (7.8%) are the
top three countries that the fund has invested in. More than half
are securities are from Industrials (55.8%) sector, while
Financials (26.5%) and Utility (10.1%) round out the top
three.
More than 70% of the debt held by the fund is investment grade
rated.
SPDR BofA ML Emerging Markets Corporate Bond ETF (
EMCD
)
EMCD is the latest entrant in the broader emerging market
corporate bond space. It holds senior and secured US dollar debt
issued by the corporate in the emerging markets.
With 460 holdings, it is most diversified of the three. Brazil
(19.9%), Russia (14.5%) and Mexico (11.2%) are the top three in
terms of country exposure.
Like CEMB, this ETF also has highest exposure to the
Industrials (39.0%), followed by Non-corporates (35.3%) and
Finance (12.5%)
About 80% of the securities held by the ETF are investment
grade rated.
|
|
EMCB
|
CEMB
|
EMCD
|
|
Inception Date
|
3/8/12
|
4/17/12
|
6/18/12
|
|
Net Assets (million)
|
$60.2
|
$21.2
|
$15.9
|
|
Number of Holdings
|
30
|
128
|
460
|
|
Effective Duration (years)
|
6.28
|
5.61
|
5.74
|
|
Yield to Maturity
|
5.25%
|
3.95%
|
4.10%
|
|
Expense Ratio
|
0.60%
|
0.60%
|
0.50%
|
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
.
Click to get this free report >>
ISHARS-EM CBF (CEMB): ETF Research Reports
WISDMTR-EM CBF (EMCB): ETF Research Reports
SPDR-BAML EMCB (EMCD): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment
Research
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report