The Definitive Guide to Non-USD EM Bond ETFs
Three things have become abundantly clear regarding emerging markets bond ETFs. First, ETF sponsors have not been shy about rolling out new funds serving the emerging markets fixed income niche.
Second, investors have not been shy about embracing these funds. Third, it's not just the ETFs that track emerging markets bonds denominated in U.S. dollars that are flourishing.
To be sure, the dollar-denominated iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE: EMB) and the rival PowerShares Emerging Markets Sovereign Debt ETF (NYSE: PCY) are quite popular with investors. EMB is home to $4.7 billion in AUM while PCY has over $1.8 billion in AUM.
While EMB and PCY have proven their mettle over their years, they don't help investors profit from strength in local currencies or hedge against dollar weakness. Yes, it should be noted that EMB is up almost 6% year-to-date and PCY is up 6.7%, but as just one example, an ETF tracking a basket of emerging markets bonds denominated in local currencies is up 100 basis more than PCY. With that, use this guide to find the best of the best when it comes to local currency EM bond funds.
WisdomTree Emerging Markets Local Debt ETF (NYSE: ELD) The WisdomTree Emerging Markets Local Debt ETF is the fund that were referencing above when discussing an example that has outpaced EMB and PCY. Even though ELD is actively managed, it's expense ratio of 0.55% is fair for that genre of ETFs and that's cheaper than the 0.6% charged by EMB. As we noted earlier, ELD is one of the best actively managed ETFs.
ELD is currently comprised of six currency contracts and 90 bond issues from Brazil, Chile, Colombia, Mexico, Peru, Poland, Turkey, South Africa, Russia, Malaysia, Indonesia, Philippines, Thailand, China, and South Korea. Distribution yield: 3%.
iShares Emerging Markets Local Currency Bond Fund (NYSE: LEMB) Seven months ago, the iShares Emerging Markets Local Currency Bond Fund came to market as a credible challenger to ELD. LEMB charges more (0.6%), but also has a higher yield of 4.7%. LEMB offers exposure to fewer holdings than ELD (46), but more countries (19), though it should be noted that over a third of LEMB's weight is devoted to Brazil and South Korea. Year-to-date, both ELD and LEMB are down 0.31%.
WisdomTree Asia Local Debt Fund (NYSE: ALD) Another one of the better actively managed funds on the market, ALD is the Asia only equivalent of ELD. ALD also charges 0.55% and has over $407 million in AUM. Curiously, WisdomTree data indicate ALD yields less than 1%. The fund features bonds denominated in the currencies of the following Asian markets: South Korea, Malaysia, Indonesia, Philippines, Thailand, India, China, Hong Kong, Singapore, Taiwan, Australia and New Zealand.
Market Vectors EM Local Currency Bond ETF (NYSE: EMLC) EMLC is a legitimate challenger to ELD and LEMB in every sense. An AUM haul north of $743 million indicates as much and with an expense ratio of 0.49%, the Market Vectors offering is cheaper than ELD and LEMB. Despite a different country lineup, EMLC has performed in line with its two rivals thus far in 2012.
EMLC is large with almost 200 holdings Brazil, Poland, South Africa, Mexico and Malaysia represent half the fund's country weight. EMLC pays its dividends monthly and has a 12-month yield of almost 5%.
Market Vectors Renminbi Bond ETF (NYSE: CHLC) Or the PowerShares Chinese Yuan Dim Sum Bond (NYSE: DSUM). CHLC and DSUM both yield barely more than 1%, but they are two of the primary options for U.S. investors when it comes to getting exposure to Chinese Renminbi-denominated bonds.
Investors should note that new emerging markets corporate bond funds such as the WisdomTree Emerging Markets Corporate Bond Fund (Nasdaq: EMCB) and the iShares Emerging Markets Corporate Bond Fund (BATS: CEMB) hold dollar-denominated issues. Another non-dollar idea is the iShares Global ex USD High Yield Corporate Bond Fund (BATS: HYXU). That fund's currency exposure is concentrated to euros, British pounds and Canadian dollars. Not surprisingly, it focuses on developed markets
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