Play LatAm Bonds With These ETFs
Some investors have been in the game long enough to remember the Latin American debt crisis of the early 1980s. At the height of the crisis, the region's most egregious offenders – Mexico, Brazil, Venezuela and Argentina - owed major banks nearly $180 billion.
Undoubtedly, many investors have not forgotten Argentina's economic crisis, which ended a decade ago. Earlier this month, the country finally paid off its last remaining bond obligations tied to the fiscal calamity there in 1999 through 2002.
While Argentina remains politically volatile and Brazil's own socialist tendencies have weighed on the country's equities this year, it is fair to say many Latin American nations have put the darkest days of the debt crisis behind them.
As Latin America's economic growth has surged in recent years, not only have investors started to look beyond Brazilian and Mexican equities, they have embraced the robust yields of Latin American sovereigns. With some countries in the region bound to see their credit ratings boosted in the coming years, Latin American bonds do not sport nearly the risk they did a decade ago. These ETFs can help investors embrace LatAm debt. Only funds with sovereign debt exposure are featured here.
Market Vectors LatAm Aggregate Bond ETF (NYSE: BONO) BONO is the only ETF devoted exclusively to Latin American bonds, but that does not imply a great deal of risk. More than two-thirds of the ETF's 34 holdings are investment-grade issues and nearly two-thirds are dollar-denominated.
For those feeling nervous about BONO, there are two very good reasons to consider this ETF. First, there is a 30-day SEC yield of 5.5 percent. Second, PIMCO's Bill Gross sounded a bullish tone on Brazilian and Mexican bonds earlier this year. Those two countries combine for about 52 percent of BONO's weight.
WisdomTree Emerging Markets Local Debt Fund (NYSE: ELD) The WisdomTree Emerging Markets Local Debt Fund is the second-largest actively managed ETF on the market today with $1.2 billion in AUM. Nearly three-quarters of ELD 90 bond holdings are rated A, BBB, or AAA.
Like BONO, ELD is heavy on Brazil and Mexico as Latin America's two largest economies combine for almost 21 percent of the fund's weight. Chile, Peru and Colombia combine for about 10 percent of ELD's total weight, making Latin America the largest region represented in ELD. With a 30-day SEC yield of 4 percent, ELD's effective duration is about 4.4 years. ELD has gained 5.8 percent year-to-date.
Investors that want a passively managed equivalent to ELD, the Market Vectors Emerging Markets Local Currency Bond ETF (NYSE: EMLC) also allocates about 31 percent of its weight to Latin America. Also consider the SPDR Barclays Capital Emerging Markets Local Bond (NYSE: EBND).
PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE: PCY) The PowerShares Emerging Markets Sovereign Debt Portfolio is one of the oldest and largest ETFs offering exposure to emerging markets debt. PCY, which is almost five-years-old, has over $2.1 billion in AUM. In an environment where investors have craved yield and the dollar has strengthened somewhat, PCY has flourished and has gained 10 percent year-to-date. That performance puts PCY well ahead of its primary rival, the iShares JPMorgan USD Emerging Markets Bond ETF (NYSE: EMB).
Like, ELD and EMLC, PCY allocates about 31 percent of its weight to Latin America, but a Brazil/Mexico only ETF this is not. In fact, PCY does not Colombia and Peru, nor does the fund include Chilean bonds.
On the other hand, PCY does offer exposure to debt issues from El Salvador, Panama, Uruguay and Venezuela. PCY's 30-day SEC yield is 4.6 percent.
For more on Latin America and ETFs, click here.
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