Under The Hood: BONO, But Not U2 (BONO, ELD, EMCB)
One of the more obvious trends in the exchange-traded products industry this year has been the introduction of scores of new emerging markets bond ETFs. Whether it's corporate issues or sovereigns, high-yield or investment-grade, investors now have more options than ever before when it comes to gaining exposure to emerging markets debt.
Two ETF firms, BlackRock's (NYSE: BLK) iShares and Van Eck's Market Vectors, have been leading the charge in terms of new emerging markets bond funds this year, though it should be noted WisdomTree has found quite a bit of success with the WisdomTree Emerging Markets Local Debt ETF (NYSE: ELD), the WisdomTree Asia Local Debt ETF (NYSE: ALD) and the newly minted WisdomTree Emerging Markets Corporate Bond ETF (Nasdaq: EMCB).
When it comes to Latin American bonds, ELD has a 31.1% allocation to the region while EMCB's LatAm exposure exceeds 51%. The iShares Emerging Markets Local Currency Bond Fund (NYSE: LEMB) allocates a quarter of its weight to the region while the iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE: EMB) devotes almost a third of its weight to LatAm issues.
Along those lines, iShares filed plans last week to possibly introduce the iShares Latin America Bond Fund, which would track an index of dollar-denominated corporate, quasi-sovereign and sovereign debt of Latin American issuers.
That iShares won't be breaking new ground because a rival fund already exists, that being today's "Under The Hood" candidate, the Market Vectors LatAm Aggregate Bond ETF (NYSE: BONO). The Market Vectors LatAm Aggregate Bond ETF, which celebrated its first birthday earlier this month, offers some key differences to the yet-to-be introduced iShares product.
BONO tracks an index which is composed of external and local currency Latin American sovereign debt and the external debt of non-sovereign Latin American issuers denominated in U.S. dollars or euros, according to the fund's Web site. That is to say investors gain exposure to bonds denominated in a variety of currencies, not just greenbacks, with BONO.
That said, it should be noted dollar-denominated issues currently account for 60% of BONO's weight with bonds denominated in Mexican pesos and the Brazilian real combining for another 27%. Bonds denominated in Colombian pesos receive a weight of just over 8.3%. Exposure to the real probably isn't a good thing these days as that currency, along with Brazilian equities, has been hammered by Europe's sovereign debt crisis. The WisdomTree Dreyfus Brazilian Real ETF (NYSE: BZF) has lost 5% in the past month.
Home to 34 issues, BONO features an average yield to worst and an average yield to maturity of 5.99. The average yield to maturity of the fund's holdings is 15.6 years and the average coupon is 10.18%.
Investors might find some confusion regarding the quality of the BONO's holdings. Moody's rates almost three-quarters of the fund's holdings as non-investment grade, but Standard & Poor's rates 55.4% of BONO's issues investment grade while Fitch says over 57% of BONO's holdings are investment grade.
While BONO won't win any volume contests with average daily turnover of less than 3,000 shares, an issue to consider because the fund's issues may not be the most liquid either, there are some other high points to this ETF beyond currency diversity and exposure to rapidly growing global markets.
First, there is a decent chance countries such as Chile, Colombia and maybe even Peru see their credit ratings boosted, an action that would be a boon for BONO. Second, there is the matter of income. Not only does BONO yield 5.4%, it pays a monthly dividend, making it an alluring prospect for adventurous income investors. Wait for BONO to move above $24 before taking a nibble.
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