VanEck J. P. Morgan EM Local Currency Bond ET (ARCA: EMLC)

VanEck J. P. Morgan EM Local Currency Bond ET (ARCA:EMLC), Quote.Headers.trade-ideas

VanEck J. P. Morgan EM Local Currency Bond ET

VanEck Vectors J.P. Morgan EM Local Currency Bond ETF

The fund normally invests at least 80% of its total assets in securities that comprise the funds benchmark index. The index is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer. It may concentrate its investments in a particular industry or group of industries to the extent that the index concentrates in an industry or group of industries. The fund is non-diversified.

VanEck JP Morgan EM Local Currency Bond ETF

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CBON

iShares JPMorgan USD Emerging Markets Bond Fund

Market Vectors Emerging Markets Local Currency Bond ETF

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PowerShares Emerging Markets Sovereign  Portfolio

World&#39;s largest asset manager and global wealth management firm BlackRock, Inc. (NYSE: BLK) is bullish on China&#39;s domestic bond market, reported CNBC.

BlackRock Sees China Bond Market As &#39;Fairly Attractive&#39;: CNBC

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Currency ETFs

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PowerShares DB US Dollar Index Bullish Fund

An ETF Strategy For A Declining Dollar

EMAG

VanEck Lowers Fees On A Pair Of EM Bond ETFs

VANECK JPM EM LOCL CURR BND UCTS ETF

World&#39;s largest asset manager and global wealth management firm BlackRock, Inc. (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/blk#NYSE">BLK</a>) is bullish on China&#39;s domestic bond market.
In the <a href="http://www.cnbc.com/2020/10/15/blackrock-is-bullish-on-chinas-onshore-bond-market.html">interview</a> on CNBC&#39;s Street Signs Asia, BlackRock Head of Asian Credit Neeraj Seth said, &quot;We still see China bond market to be fairly attractive.&quot;
Bullish Bond Thesis: The strong credit data, weak inflation, and liquidity injection from the People&#39;s Bank of China make the bonds attractive.
The real and nominal yields with the potential direction of monetary policy support returns in fixed income.
&quot;You have high nominal yield, potential to generate returns in an environment where rates are pretty low globally and a portfolio diversification,&quot; Seth told CNBC.
China is the second-largest bond market worth $16 trillion. Foreign investor participation in Chinese onshore bonds accounts for just over 2%. As the process of inclusion of Chinese bonds in major global indexes is underway, foreign participation will increase.
With low to no correlation to global markets, China&#39;s domestic bonds offer decent returns in an environment where rates are low globally.
Seth commented on the liquidity risk factors with regards to recent China&#39;s property developer <a href="https://www.cnbc.com/2020/10/07/chinese-property-developers-rising-debt-and-junk-bonds.html">Evergrand&#39;s bond debacle</a> by mentioning that the market is large and it offers a wide array of bonds issued by the government, state-owned enterprises, and private companies.
Investors can build a portfolio that is both resilient and diversified.
BlackRock, <a href="https://www.blackrock.com/sg/en/investment-ideas/china-bond-fund">on its website</a>, mentions that China&#39;s low co-relation to global risk assets is &quot;especially important during times of extreme market volatility&quot; offering up to an 18% annualized growth rate.
Related ETFs: iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: <a class="ticker" href="https://www.benzinga.com/stock/emb#NASDAQ">EMB</a>), Invesco Emerging Markets Sovereign Debt Portfolio ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/pcy#NYSE">PCY</a>), VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/emlc#NYSE">EMLC</a>), VanEck Vectors ChinaAMC China Bond ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/cbon#NYSE">CBON</a>) and KraneShares E Fund China Commercial Paper ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/kcny#NYSE">KCNY</a>)
&nbsp;

BlackRock Sees China Bond Market As 'Fairly Attractive'

Among the most popular calls on Wall Street heading into 2019 was the call for a weaker dollar.
Last year, the Invesco DB US Dollar Bullish ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/uup#NYSE">UUP</a>) gained 7.1&nbsp;percent, easily making it one of the year&#39;s best-performing currency exchange traded funds.
It will take some time for an official dollar bear market to arrive, if it arrives at all, but UUP is off modestly to start 2019. Ongoing dollar weakness could spark renewed interest in a variety of assets, including emerging markets bonds.
<h3>What Happened</h3>
Neither dollar-denominated nor local currency emerging markets were spared the dollar&#39;s wrath last year.
The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/emlc#NYSE">EMLC</a>) slid 7.6&nbsp;percent last year, while a widely followed gauge of dollar-denominated emerging markets debt dipped 5.5 percent.
A weaker dollar could spark a rebound for EMLC this year, a scenario that is materializing on a modest basis &mdash; as highlighted by the ETF&#39;s 2.73-percent year-to-date gain.
&ldquo;In an environment with less external pressure, we believe many emerging markets currencies could rally,&rdquo; VanEck in <a href="https://www.vaneck.com/blogs/emerging-markets-bonds/looking-to-emfx-if-dollar-strength-wanes-in-2019">a Thursday note.</a> &ldquo;First, a slowdown and perhaps end of the Federal Reserve&rsquo;s&nbsp;rate hiking cycle seems likely in the coming year.&rdquo;
<h3>Why It&#39;s Important</h3>
Speculating that emerging markets currencies are poised to rebound this year is one thing. Identifying the winners is another thing altogether. Nearly 20 currencies are represented in EMLC at weights ranging from 2.97 percent to 10.33 percent.
To start 2019, EMLC has been bolstered by the Brazilian real and the Indonesian rupiah, two of the best-performing emerging markets currencies to start 2019, and EMLC&#39;s second- and third-largest currency exposures, respectively.
&ldquo;Second, a fair amount of risk premium is built into emerging markets local rates and EMFX, which looks excessive, in our view, compared to fundamentals such as the growth differential with the U.S., creating a fertile ground for emerging markets rallies,&rdquo; according to VanEck.&nbsp;
<h3>What&#39;s Next</h3>
As is the case with other emerging markets investments, there is some risk involved with EMLC. For instance, just under 53 percent of the fund&#39;s 277 holdings carry investment-grade ratings and most of those are at the lower end of the investment-grade spectrum. Compensation for that risk is strong, however, as EMLC sports a 30-day SEC yield of 6.8&nbsp;percent.
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Stock Split

Market Vectors High Yield Municipal Index ETF

Market Vectors Intermediate Municipal Index

VanEck Reports 1-For-2 Reverse Split For VanEck Vectors J.P Morgan EM Local Currency Bond ETF (EMLC), VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM), VanEck Vectors High-Yield Municipal Index ETF (HYD)

VanEck said it is lowering the expense ratios on two of its exchange traded funds that track emerging markets debt.
The pair includes the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/emlc#NYSE">EMLC</a>), the largest ETF holding emerging markets bonds denominated in local currencies.
<h3>
	What Happened</h3>
In a <a href="https://www.businesswire.com/news/home/20180608005543/en/VanEck-Lowers-Expense-Ratio-VanEck-Vectors®-J.P.#.Wx0ftNt4v6o.twitter">statement out last Friday</a>, New York-based VanEck said it is trimming EMLC&#39;s annual fee from 0.42 percent to 0.3 percent, or $30 on a $10,000 investment.
&ldquo;EMLC is the largest and most liquid U.S. listed ETF providing access to emerging markets local currency bonds. It seeks to track the J.P. Morgan GBI-EMG Core Index, which is comprised of bonds issued by emerging markets governments and denominated in the local currency of the issuer,&rdquo; according to the statement.
The $4.6-billion EMLC is nearly eight years old. EMLC holds 276 bonds and has a 30-day SEC yield of 6.13 percent. The ETF&#39;s effective duration is 5.09 years.
<h3>
	Why It&#39;s Important</h3>
The VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSE: <a class="ticker" href="https://www.benzinga.com/stock/emag#NYSE">EMAG</a>) also received a lower expense ratio. VanEck pared EMAG&#39;s annual fee from 0.49 percent to 0.35 percent.
&ldquo;EMAG is the only U.S.-listed ETF that provides comprehensive exposure to the full emerging markets debt opportunity set,&rdquo; according to VanEck. &ldquo;It seeks to track the MVIS&nbsp;EM Aggregate Bond Index, which is comprised of emerging market sovereign bonds and corporate bonds denominated in U.S. dollars, euros, or local emerging markets currencies, and includes both investment-grade and below-investment grade rated securities.&rdquo;
EMAG recently turned seven years old. The $14.5-million ETF has a 30-day SEC yield of 4.58 percent and holds 169 bonds. EMAG&#39;s effective duration is 4.69 years.
<h3>
	What&#39;s Next</h3>
EMLC allocates over 36 percent of its combined weight to Brazil, Indonesia, Mexico and Poland. EMAG&#39;s top four country weights are, in order: Mexico, Brazil, Russia and China.
Emerging markets bond funds are struggling this year amid dollar strength and speculation that the Federal Reserve will continue raising interest rates. The asset class has also been hampered by surprise rate hikes in Argentina and Turkey, among other developing economies.
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VanEck Lowers Fees On A Pair Of Emerging Market Bond ETFs

History has a way of repeating itself in financial markets. Previous environments of rising U.S. interest rates and a stronger dollar have plagued emerging markets assets, including bonds.
It&#39;s occurring again this year as exchange traded funds holding both dollar-denominated and local currency-denominated emerging markets debt are flailing. The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>), one of the largest ETFs holding developing world debt issued in local currencies, is down more than 6 percent this year.
<h3>
	What Happened</h3>
A strong dollar hampers emerging markets debt issuers on multiple fronts. There is the obvious effect of the dollar strengthening against local currencies. Commodities are also part of the equation. Several large developing economies, including Brazil and Mexico, are major commodities exporters and producers. A strong dollar usually means weaker commodities prices. Twenty percent of EMLC&#39;s currency exposure is the Brazilian real and the Mexican peso.
&ldquo;As emerging markets local debt lost more than 8 percent since the beginning of April and moved into negative territory for the year, there were some powerful reminders of the sources of volatility that can appear among the geographically, economically and politically diverse landscape of emerging markets,&quot; VanEck said&nbsp;<a href="https://www.vaneck.com/blogs/emerging-markets-bonds/beyond-recent-em-debt-volatility/">in a recent note</a>.
<h3>
	Why It&#39;s Important</h3>
At the start of this year, many market observers expected Mexico would be the only emerging market to raise interest rates. Mexico has raised rates, but other developing economies have, perhaps surprisingly, joined the party. That includes Argentina and Turkey.
&ldquo;Second, additional risk has also been priced into most of the better economic and political performers,&rdquo; said VanEck. &ldquo;Ironically, one of the worst-performing markets, Argentina, has been pursuing fiscal reforms and has a central bank that has reacted prudently and independently to negative flows.&rdquo;
Argentina&#39;s benchmark borrowing rate is now 40 percent while Turkey&#39;s is 8 percent. Those countries combine for 7.7 percent of EMLC&#39;s weight.
<h3>
	What&#39;s Next</h3>
Political risk is potentially on the horizon for emerging markets assets. Next month, Turkey holds national elections followed by Mexico in early July and Brazil in early October.
&ldquo;In addition, although rate increases by the U.S. Federal Reserve continue to be gradual and well-telegraphed, any signals that elevate the probability of three or more additional hikes over the remainder of the year will likely result in more pain for emerging markets currencies,&rdquo; according to VanEck.
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Emerging Market Debt: Reconsidering A Beaten-Up Asset Class

Bonds and commodities are rarely joined at the hip, but when it comes to emerging markets debt, commodities can be an important determinant of returns. Some exchange traded funds confirm that rising commodities benefit emerging markets bonds.
Over the past 12 months, the S&amp;P GSCI Commodity Index is up 7.5 percent, while the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>) is higher by 13.2 percent over that period. EMLC&#39;s positive correlation to commodities prices is not surprising. The ETF holds bonds denominated in local currencies, meaning it benefits from a weaker U.S. dollar &mdash; as do commodities.
&ldquo;Commodity prices have been on a steady upswing since early 2016, rising over 40 percent through Jan. 31, 2018,&rdquo; VanEck said&nbsp;<a href="https://www.vaneck.com/blogs/emerging-markets-bonds/commodities-rally-uneven-tailwind/">in a recent note</a>. &ldquo;Many investors, assuming a tight link between commodity prices and emerging market local currency returns, fairly view broad emerging markets exposure as a way to play the recovery in commodities.&rdquo;
<h3>
	EMLC Commodities Exposure</h3>
EMLC has a 30-day SEC yield of 5.72 percent, which is well above what investors receive on 10-year Treasuries or the MSCI Emerging Markets Index. The ETF holds 289 bonds, plenty of which hail from developing markets that are major commodities producers.
Brazil, Mexico, Indonesia and South Africa, all of which are major producers of various commodities, are four of EMLC&#39;s top five country exposures. That quartet combines for nearly 36 percent of the ETF&#39;s geographic weight. Overall, EMLC features exposure to 20 countries, more than half of which can be considered large commodities producers.
&ldquo;The overall moderate correlation of index returns with oil prices reflects the diversity of economies within the index,&rdquo; said VanEck. &ldquo;Despite rising commodity prices since 2016, the majority of emerging markets local currency bond returns over the past five years have been driven by local interest rates rather than currency appreciation.&rdquo;
<h3>
	Risks</h3>
In addition to a sudden reversal in commodities prices, the primary potential risks facing ETFs like EMLC are interest rate and credit risk. In the case of rate risk, no emerging markets aside from Mexico are expected to hike rates this year, so rate risk is mostly off the table for EMLC.
Over half of EMLC&#39;s holdings carry junk ratings, so there is some credit risk, though that has been somewhat mitigated by the recent Standard &amp; Poor&#39;s <a href="https://www.bloomberg.com//news/articles/2018-02-23/russia-gets-first-s-p-upgrade-in-over-decade-to-exit-junk-status">upgrade of Russia</a> to investment-grade territory. Russian bonds account for 5.3 percent of EMLC&#39;s roster.
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Specialty ETFs

Commodities

A Bond ETF For Commodities Upside

The Fed may have enacted three rate hikes this year but geopolitics and mixed U.S. economic readings have kept U.S. Treasury yields at check.&nbsp;U.S. benchmark Treasury bond yields have hovered in the range of 2.05% to 2.62% this year (as of Dec 27, 2017), with an average of 2.33%.
Trump&#39;s policy uncertainty in the middle of the year and Fed minutes, which showed policymakers&#39; suspicion about subdued inflation, probably led to this move in the fixed income market. Though the economy picked up pace in the fourth quarter, President Trump passed the tax reform agenda and the Fed enacted its final hike, average bond yields (2.37%) did not shoot up materially.&nbsp;
This was because, with Fed officials sticking to their outlook for three more rate hikes in 2018 despite speeding economic growth, there is no spark in the guidance either. In fact, an air of dovishness was prevalent. The median Fed funds rate for this year and the next were unchanged (read: <a href="https://www.zacks.com/stock/news/286001/etf-winners-amp-losers-post-partly-dovish-fed-meet">ETF Winners &amp; Losers Post Partly Dovish Fed Meet</a>).
As a result, bond funds returned decently in 2017. PIMCO 25+ Year Zero Coupon US Treasury ETF ZROZ returned about 12% this year against 19.6% returns in SPDR S&amp;P 500 ETF SPY.
However, there are several international bond ETFs that offered great returns during this time frame. Since most of the developed economies are still practicing a low interest rate policy, international bonds got a chance to roar even higher. Against this backdrop, below we highlight a few top-performing bond ETFs.
iShares International High Yield Bond ETF HYXU &ndash; Up 17.8%
The underlying Markit iBoxx Global Developed Markets ex-US High Yield Index is a rules-based one, consisting of high yield corporate bonds denominated in Euros, British pounds sterling and Canadian dollars. The index is designed to provide a broad representation of the global ex-U.S. dollar high yield corporate bond market. The fund charges 40 bps in fees.
SPDR Bloomberg Barclays International Corp Bond ETF IBND &ndash; Up 13.5%
The 618-security fund looks to provide broad exposure to the global investment grade, fixed rate, fixed income corporate markets outside the United States. The fund charges 50 bps in fees. Average maturity in years is 6.61, while adjusted duration is 5.82 years.&nbsp;
PowerShares International Corp Bond ETF PICB &ndash; Up 11.3%
The underlying index measures the performance of investment grade corporate bonds issued by non-U.S. issuers. The 411-stock fund charges 50 bps in fees. Years to Maturity of the fund is 9.32 and effective duration is 7.31 years.
SPDR Bloomberg Barclays Emerging Markets Local Bond ETF EBND &ndash; Up 11.1%
The underlying index &ndash; the Bloomberg Barclays EM Local Currency Government Diversified Index &ndash; is designed to measure the performance of the fixed-rate local currency sovereign debt of emerging market countries. The fund looks to offer exposure to fixed-rate local currency sovereign debt of emerging market countries. It charges 40 bps in fees. Average maturity of the fund is 7.36 years and adjusted duration is 5.29 years.
VanEck Vectors JP Morgan EM Local Bond ETF EMLC &ndash; Up 7.5% 
The fund comprises 266 bonds issued by emerging market governments and denominated in the local currency of the issuer. The fund charges 44 bps in fees. Years to Maturity of the fund is 7.65 and effective duration is 5.10 years. The fund yields about 5.34% annually (as of Dec 27, 2017) (read: <a href="https://www.zacks.com/stock/news/271415/em-etfs-what-you-need-to-know-before-investing">EM ETFs: What You Need to Know Before Investing</a>).
<img alt="" src="https://staticx-tuner.zacks.com/images/zadmin_tuner_image/bond etfs chart.jpg" style="width: 620px; height: 166px;" />

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EBND

HYXU

SPDR Barclays Capital Internationalorate Bond ETF

IBND

PICB

PIMCO 25+ Year Zeroupon US Treasury Index Fund

ZROZ

5 Best Bond ETFs Of 2017

Fixed-income exchange traded funds are on a blistering pace of asset gathering in 2017, having shattered previous inflows records. Several of this year&#39;s top 10 asset-gathering ETFs are bond funds. While it remains to be seen if that scenario will repeat in 2018, some corners of the bond market can build on solid 2017 performances next year.
With investors continuing to search for additional income and yield at a time when interest rates remain low throughout the developed world, emerging markets bonds denominated in local currencies could again deliver for investors in 2018.
That would be good news for the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>). EMLC is alluring to income investors with a 30-day SEC yield of 5.75 percent, which is well above what investors find in 10-year Treasuries. Additionally, EMLC is up 7 percent this year while major aggregate bond benchmarks are up less than 1 percent.
<h3>
	A Repeat Performance</h3>
&ldquo;Emerging markets local currency sovereign bonds will likely be one of the best-performing fixed income asset classes in 2017 based on year-to-date performance,&rdquo; <a href="https://www.vaneck.com/blogs/emerging-markets-bonds/local-returns-may-carry-into-2018/">said VanEck</a>. &ldquo;Similar to 2016, returns have been driven primarily by local interest rates rather than foreign currency, and we expect the same dynamic to play out in 2018. Generally stable or improving fundamentals in emerging markets and global growth will, in our view, likely provide support against higher interest rates in developed markets.&rdquo;&nbsp;
Bonds denominated in local currencies are vulnerable to a stronger dollar, but if the greenback bounces back in 2018, many market observers believe those increases will be gradual. Interestingly, the U.S. Dollar Index has traded slightly lower since the most recent interest rate hike by the Federal Reserve earlier this month. The U.S. Dollar Index is lower by more than 8 percent this year.
The $4.6-billion EMLC holds 265 bonds. About three-quarters of the ETF&#39;s holdings are rated A, BBB or BB.
<h3>
	Market-To-Market Impact</h3>
EMLC features exposure to nearly 20 countries and bonds denominated in 18 different emerging currencies.
Brazil and South Africa combine for almost 17 percent of EMLC&#39;s geographic exposure.
In Brazil, politics have been plagued by scandals and kept structural reforms on the backburner, according to VanEck. The Brazilian economy is beginning to show signs of growth, meaning it&#39;s time for progress in achieving reforms in the South American country, the firm said.&nbsp;
South Africa &quot;is among the weakest countries in the J.P. Morgan GBI-EM Global Core Index from a fiscal and economic perspective, which is reflected in its deteriorating credit ratings,&quot; according to VanEck.&nbsp;
&quot;The recent election of Cyril Ramaphosa as leader of the ruling party is a strong signal of progress, but executing needed reforms may be challenging and take time.&rdquo;
The good news is that in 2017, only one emerging market, Mexico, raised interest rates. It is likely a similarly low number of developing economies will do the same next year.
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A Bond ETF Idea Using Local Currencies For 2018

Fixed income exchange traded funds have long viewed as an important growth avenue for the broader ETF industry. That theme has been on display this year as bond ETFs broke annual inflows records with several months left in the year.
Emerging markets bond funds are among the fixed income ETFs that are experiencing rapid growth. There is plenty of room for that growth to continue. Around the world, investors allocate $500 billion to emerging markets debt, but just about $50 billion of that total is devoted to ETFs. The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>) controls a tidy $4.2 billion of that total.
Although the Federal Reserve and some other developed markets central banks are considering interest rate increases, rates are low and, in some cases, negative, throughout the developed world. That is one of the factors prompting investors to consider emerging markets debt.
<h3>
	Expect More Inflows</h3>
EMLC is on a torrid pace of asset gathering this year. Investors have allocated $1.75 billion in new capital to the ETF year-to-date, a hefty percentage of the fund&#39;s overall assets under management. It is reasonable to expect this trend will continue for EMLC and rival funds.
&ldquo;Year-to-date through October, ETFs garnered 23 percent of net inflows into the asset class globally and 49 percent in the U.S.,&rdquo; said Van Eck <a href="https://www.vaneck.com/blogs/emerging-markets-bonds/etfs-taking-share-in-em-debt/">in a recent note</a>. &ldquo;Additionally, over the past four years, while other vehicles have experienced outflows, flows into ETFs have been positive.&rdquo;&nbsp;
EMLC, which holds 270 bonds, has a 30-day SEC yield of 5.87, which is a source of allure for income-starved investors. Over 53 percent of the ETF&#39;s holdings are rated A or BBB.
<h3>
	Addressing Liquidity Concerns</h3>
When it comes to ETFs tracking more nuanced corners of the bond market, such as emerging markets debt and junk-rated corporates, investors are often concerned about liquidity. Data suggest emerging markets bond ETFs offer robust liquidity and may be better ideas than individual issues.
&ldquo;Despite the questions that have been raised about the liquidity of these products (and bond ETFs in general), secondary market liquidity has held up through these various events,&rdquo; said VanEck. &ldquo;Ultimately, the underlying bonds drive liquidity and ETFs are no different from either mutual funds or separate accounts in this respect. However, ETFs provide an additional layer of secondary market liquidity, particularly for larger and heavily traded funds, potentially resulting in lower trading costs for investors.&rdquo;
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Another Growth Frontier For ETFs

Venezuelan sovereign bonds have been among the world&#39;s most volatile. On Wednesday, the South American country unveiled a debt restructuring deal with Russia and, separately, earned words of encouragement from another major creditor: China.
Earlier this week, S&amp;P Global Ratings said Venezuela was in selective default on two its bond issues, maturing in 2019 and 2024. On Tuesday, Fitch Ratings downgraded Venezuela&#39;s Long-Term Foreign Currency Issuer Default Rating to &ldquo;RD,&quot; or restricted default, from &ldquo;C.&rdquo; The controversy surrounding Venezuela&#39;s ability to repay its debts is not hampering exchange traded funds holding the country&#39;s bonds.
Venezuelan bonds are found in many hard-currency emerging-markets debt ETFs, but the majority of these funds are passively managed and the indexes they track do not have significant exposure to Venezuelan debt. For example, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: <a class="ticker" href="/stock/emb#NASDAQ">EMB</a>), the largest emerging markets bond ETF, allocates less than 1.3 percent of its weight to Venezuela&#39;s sovereign debt.
EMB can hold bond defaults as highlighted by previous exposure to Ukraine and Argentina, but weights to defaulted bonds typically decline in the fund&#39;s index. As that debt is restructured, EMB&#39;s index can increase its weight to those bonds.
<h3>
	Allocations Matter</h3>
&ldquo;At present, there is no meaningful amount of local-currency Venezuelan debt outstanding thanks to the country&#39;s hyperinflation,&rdquo; <a href="http://beta.morningstar.com/articles/836439/etf-investors-shouldnt-cry-for-venezuelas-bonds-.html">said Morningstar.</a> &ldquo;Hyperinflation has all but wiped out the value of the country&#39;s local-currency debt as the government has kept printing more money to meet its obligations. As a result, the country&#39;s bolivar-denominated domestic debt is essentially worthless, which explains why only hard-currency Venezuelan debts are owned by virtually all emerging-markets bond funds.&rdquo;&nbsp;
What that means is that local currency bond ETFs are unlikely to hold Venezuelan bonds. The $4.2 billion VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>) holds 270 bonds denominated in local currencies. Although a significant portion of that ETF&#39;s geographic exposure lies in South America, EMLC features no bolivar-denominated issues.
<h3>
	Reminders</h3>
The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE: <a class="ticker" href="/stock/pcy#NYSE">PCY</a>) has $4.9 billion in assets under management and is the second-largest dollar-denominated emerging markets bond ETF behind EMB.
With just 83 holdings, PCY&#39;s roster is small compared to rivals such as EMB and EMLC. PCY holds previous defaults, including Argentina and Ukraine, as well as some speculative CCC-rated issues, but the ETF has a Venezuela weight of just 1.7 percent.
&ldquo;The Venezuelan debt situation is a good reminder for investors how important it is to understand the inner workings of indexes tracked by ETFs,&rdquo; said Morningstar. &ldquo;In the process of digging in, investors will recognize that most emerging-markets debt ETFs&#39; Venezuelan exposure comprises less than 3 percent of their portfolio.&rdquo;
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Venezuela's Woes Are Barely Felt By Emerging Market Bond ETFs

Emerging markets fixed income exchange-traded funds have been a popular destination for income-starved investors and that is true of those funds that hold bonds denominated in local currencies. With the dollar slumping against an array of developing world currencies, ETFs such as the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>) are benefiting.
Not only does EMLC tempt with a 30-day SEC yield of 5.64 percent, but the ETF is more than a yield play as highlighted by a year-to-date return of almost 11 percent. EMLC, which debuted more than seven years ago, tracks the J.P. Morgan GBI-EMG Core Index. The ETF holds 265 bonds, a testament to the rapid growth of the emerging markets fixed income space in recent years.
EMLC features exposure to 20 countries, many of which are large, predictable developing markets, but recent changes to emerging markets bond indexes, are benefiting funds like EMLC.
<h3>New Additions</h3>
&ldquo;The emerging markets local debt universe has grown tremendously over the past several years,&rdquo; said VanEck <a href="https://www.vaneck.com/blogs/emerging-markets-bonds/new-countries-added-local-debt-index/">in a recent note</a>. &ldquo;Within the last five years, the investable universe has grown 37 percent to $1.2 trillion versus approximately $900 billion of U.S. dollar-denominated sovereign debt. Investors today benefit from a more diverse opportunity set with greater market depth, in addition to the attractive yields offered by the asset class.&rdquo;
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Brazil, Mexico and Poland combine for over 28 percent of EMLC&#39;s weight, but the ETF&#39;s underlying index has recently made room for new countries with potentially lucrative fixed income opportunities for investors.
&ldquo;This year alone, three new countries, Argentina, Czech Republic, and Uruguay, have been added to the J.P. Morgan GBI-EM Global Core Index,&rdquo; said VanEck. &ldquo;Romania was added in 2013.&rdquo;
Argentina, Czech Republic, and Uruguay combine for almost 8 percent of EMLC&#39;s weight. Romanian bonds represent nearly 3 percent of the fund&#39;s weight.
<h3>Minimal Increased Credit Risk </h3>
Currently, over 56 percent of EMLC&#39;s holdings are rated A or BBB with another 17.5 percent rated BB, indicating the ETF&#39;s credit risk profile has not increased in alarming fashion following the addition of countries such as Argentina, Czech Republic and Uruguay.
&ldquo;Overall the Index has shifted exposure towards Latin America and European emerging markets and away from Asia and Middle East/Africa. Compared with five years ago, credit quality is unchanged to one notch lower, depending on the rating agency scale used,&rdquo; according to VanEck.
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Changes Benefit This EM Bond ETF

Although the Federal Reserve has boosted interest rates twice this year, Treasury yields have not ascended in the expected fashion, prompting income investors to continue considering alternatives to prosaic fixed-income assets.
That income search continues to include emerging markets bonds, an asset classes accessible via an array of exchange-traded funds. With the U.S. dollar ranking as one of this year&#39;s worst-performing major currencies, emerging markets debt denominated in local currencies can reward investors while delivering yield.
The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>) has a 30-day SEC yield of 5.5 percent and is up 10 percent year to date. The $4.2 billion ETF holds over 260 emerging markets bonds denominated in local currencies.
<h3>Tame Inflation Bodes Well</h3>
Emerging markets inflation can often run hot compared to developed market economies, which can weigh on developing world bonds. However, data suggest that inflation is currently benign in some major emerging markets.
&ldquo;The higher nominal yields of emerging markets local bonds compensate U.S. dollar-based investors for the risk posed by local inflation, which can be associated with negative currency returns, particularly if inflation goes unchecked,&rdquo; said VanEck <a href="https://www.vaneck.com/blogs/emerging-markets-bonds/real-yields-rule/">in a recent note</a>. &ldquo;But controlled inflation and positive real interest rates can generally be supportive for a local currency. In addition, positive real rates provide more room for emerging markets central banks to ease monetary policy if economic growth slows. This conventional policy tool may not be as effective in developed markets currently, given extremely low or even negative rates.&rdquo;
EMLC has an effective duration of 5.15 years. Duration measures a bond&#39;s sensitivity to changes in interest rates. The ETF has a yield to worst of almost 6 percent.
<h3>What&#39;s Inside EMLC</h3>
EMLC, which turned seven years old in July, allocates about 37 percent of its combined weight to local currency bonds issued by Brazil, Mexico, Poland and Indonesia. Of that quartet, Brazil has been paring rates and only Mexico is likely to raise rates in the near term, but Mexico&#39;s central bank would do that as a means of damping inflation.
&ldquo;Inflation has generally remained under control in recent years in the countries represented in the J.P. Morgan GBI-EM Global Core Index,&rdquo; said VanEck. &ldquo;Even in countries where inflation has been more of a concern (e.g., Mexico and Argentina), central banks have taken hawkish steps, including raising interest rates, and inflation is expected to slow. As of July 31, 2017, the weighted average real 10-year government yield of countries in the Index was 2.3%.&rdquo;
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Looking For Yield? Try This Bond ETF

Helped in part by the disappointing dollar, some emerging-market currencies have been solid performers this year, providing support for bonds denominated in those currencies. For example, the Market Vectors Emerging Mkts Local ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>) is up 8 percent year to date compared to a gain of less than 5 percent for the largest emerging-market bond exchange-traded fund that holds dollar-denominated bonds.
EMLC is nearly 7 years old and home to $3.2 billion in assets under management, making it one of the oldest and largest emerging-market bond ETFs with local currency-denominated holdings. The ETF tracks the JPMorgan GBI-EMG Core Index and holds 254 bonds.
One of the most obvious reasons explaining the popularity of ETFs such as EMLC is yield, pure and simple. With trillions of dollars of negative-yielding floating around throughout the developed world, EMLC&#39;s 30-day SEC yield of 5.56 percent is undoubtedly enticing. While EMLC holds sovereign bonds, investors should still examine the credit ratings of the issuers of bonds in this and other emerging-market bond ETFs.
<h3>Junk Is Piling Up</h3>
&ldquo;Why worry about the &#39;junk&#39;? Because there is more of it,&rdquo; said VanEck <a href="https://www.vaneck.com/blogs/emerging-markets-bonds/your-allocation-may-now-be-junk/">in a recent note</a>.
<ul>&ldquo;Moody&#39;s downgrade of China in May received the most attention, but had less impact on investors given its lack of presence in emerging markets bonds indices. On the other hand, Brazil and South Africa suffered ratings downgrades that have had a greater impact for investors. Both countries have been punished by elevated political risks that have threatened key fiscal and economic reforms. South Africa was downgraded by both S&amp;P and Fitch from investment grade status to high yield status. Brazil, which was placed on negative watch by S&amp;P, lost its investment grade rating in 2015.&rdquo;</ul>
Brazil and South Africa combine for 16.4 percent of EMLC&#39;s weight. The ETF features no exposure to Chinese debt. EMLC&#39;s two largest country weights are Poland and Mexico. That duo combines for over 19 percent. Nearly 20 countries are represented in the ETF.
<h3>Considering Credit Quality </h3>
Unfortunately, emerging markets' credit quality<a href="https://www.benzinga.com/trading-ideas/long-ideas/17/01/8958776/theres-still-opportunity-in-em-bond-etfs"> is worsening while spreads are tightening</a>, meaning investors are not getting adequate compensation for the risk associated with some developing world debt.
&ldquo;This means that emerging markets bonds investors are likely to have more &#39;junk&#39; in their portfolios, and are assuming significantly more credit risk than they were only four years ago,&rdquo; said VanEck. &ldquo;Since 2013, the average emerging markets bond rating has dropped from BBB- to BB+. At the same time, yields and spreads have tightened, and investors are getting paid less to assume more risk.&rdquo;
Fortunately, EMLC is a mostly investment-grade portfolio. More than two-thirds of the ETF&#39;s holdings carry investment-grade ratings while fewer than 14 percent are rated junk. The remainder are not rated.
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Knowing What's In Your EM Bond ETF

The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>) is one of the dominant names among emerging markets bond exchange traded funds. Going a step further, EMLC is perhaps the king of emerging markets bond ETFs where the fund&#39;s holdings are denominated in local currencies, not U.S. dollars.
Good news for investors: It just got a little cheaper to own EMLC.
New York-based VanEck said Wednesday it&#39;s lowering EMLC&#39;s annual fee to 0.44 percent from 0.47 percent. EMLC&#39;s new expense ratio works out to $44 per year on a $10,000 investment.
EMLC tracks the J.P. Morgan GBI-EMG Core Index (GBIEMCOR), &quot;which is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer,&rdquo; <a href="https://www.vaneck.com/etf/income/emlc/overview/">according to VanEck</a>.
EMLC, which debuted in July 2010 and now holds $3.3 billion in assets under management, has nearly 250 holdings and a 30-day SEC of just over 5.7 percent.
&ldquo;Investor interest in emerging markets bonds has continued this year due to their attractive yield potential and the stabilization and improvement in many emerging markets economies, which in the case of bonds denominated in local currencies may provide investors with the opportunity to benefit from currency appreciation,&rdquo; Fran Rodilosso, head of fixed income at VanEck, said in a statement.
EMLC&#39;s four largest geographic weights are Mexico, Poland, Indonesia and Brazil with weights ranging from 9.9 percent for Mexico to almost 8.8 percent for Brazil. Brazil and Mexico are Latin America&#39;s two biggest economies. Overall, 18 countries are represented in EMLC.
&ldquo;EMLC has attracted approximately $1.8 billion of inflows since January 2016 and, as of March 31, 2017, had over $3 billion in assets under management,&rdquo; said VanEck in the statement. &ldquo;VanEck regularly evaluates fund expenses to identify opportunities to lower shareholder costs. The reduction in EMLC&rsquo;s expense cap allows investors to benefit from the economies of scale that have resulted from the significant asset growth over the past year.&rdquo;

A Lower Fee For This Emerging Markets Bond ETF

Emerging markets bond exchange traded funds spent considerable time as one of 2016&#39;s hottest asset classes, a status aided by a sanguine outlook for U.S. interest rates and a lethargic dollar. Those scenarios changed later in the year as the Federal Reserve boosted interest rates in December.

	With many market observers betting the dollar will remain sturdy this year and that the Fed could possible hike rates multiple times, a case can be made that emerging markets debt ETFs face headwinds. Dollar strength is believed to be a potentially thorny issue for ETFs such as the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>), which holds debt denominated in local currencies.

	To its credit, EMLC has dealt with tricky environment to start 2017 with a gain of more than 2 percent. EMLC has an effective duration of less than 4.9 years, putting it in the middle part of the curve, so the fund is not intensely vulnerable to hawkish <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/09/8423177/good-reasons-to-love-these-bond-etfs">changes in U.S. monetary policy</a>.&nbsp;

	&ldquo;Despite significant weakness in local currencies in November, local currency bonds returned 1.9% for the month and 9.9% for the year. Brazil, Russia, and South Africa were the strongest contributors for the year with significant gains from both local rates and currencies, while the segment overall attributed almost all of its return to rates,&rdquo; said VanEck <a href="https://www.vaneck.com/blogs/emerging-markets-bonds/opportunity-in-emb/">in a recent note</a>.

	Mexican debt and the peso were punished in the wake of Donald Trump&#39;s win the November U.S. presidential election while the Turkish lira has come under pressure due to political volatility there. Mexico is EMLC&#39;s second-larges geographic weight at 8.8 percent behind Poland, but the ETF devotes than 6 percent of its weight to Turkish bonds.

	Mexico has been a drag on the ETF in the wake of Trump&#39;s win because of his harsh rhetoric<a href="http://www.benzinga.com/news/16/11/8722042/a-problem-area-within-a-problem-etf"> aimed at Mexico</a>. Not to mention the peso has been a laggard among emerging currencies last year. On the upside, Mexico carries an investment-grade rating and is historically not as volatile as other emerging economies.

	&ldquo;However, we believe that the different segments of emerging markets bonds provide opportunities in 2017. From a valuation standpoint, yields and spreads on local and hard currency sovereign bonds, respectively, are above five-year averages. Given recent outflows, which moderated in December, technicals do not appear unfavorable. More importantly, economic growth and external positions continue to improve and there are signs of fiscal discipline and structural reforms, particularly in Latin America,&rdquo; adds VanEck.

	The $2.6 billion EMLC carries a 30-day SEC yield of 5.92 percent.

Politics

General

There's Still Opportunity In EM Bond ETFs

Price action confirms that, as expected, emerging markets assets did not enjoy the outcome of last month&#39;s U.S. presidential election. The ensuing rally in the U.S. dollar ensured previously hot emerging markets bonds suffered last month as well.
<h3>Emerging Markets And The U.S. Presidential Election</h3>
The Market Vectors Emerging Mkts Local ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>), which as its name implies, holds emerging markets debt denominated in local currencies, fell 7.7 percent last month.
Emerging markets governments and some corporations binge borrowed in dollars during the various versions of the Fed&#39;s quantitative easing programs. It looked smart, as the dollar weakened against a plethora of developed and emerging currencies, but those emerging markets borrowers <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/07/8220916/a-new-etf-avenue-for-em-sovereign-debt">were caught off guard</a> when the dollar started soaring several years ago.
With dollar soaring in the wake of President-elect Donald Trump&#39;s victory and in anticipation of the Federal Reserve boosting interest rates later this month, emerging markets bonds and ETFs such as EMLC make for easy targets for the &ldquo;vulnerable&rdquo; label, but there might be more to the story. Notably, today&#39;s emerging markets debt market looks much different than it did a decade ago.
&ldquo;The emerging markets debt asset class has grown tremendously in the past two decades. It now has a market capitalization of more than $3.6 trillion (as of October 31, 2016), as measured by J.P. Morgan&rsquo;s emerging markets bond indices, versus approximately $1.1 trillion ten years ago. In addition to its growing size, the emerging markets debt market has become incredibly diverse and now includes bonds issued by sovereign, quasi-sovereign, and corporate entities in both hard currencies (mainly U.S. dollars and euros) and local currencies,&rdquo; said VanEck <a href="https://www.vaneck.com/blogs/emerging-markets-bonds/case-for-emb-part-1/">in a recent note</a>
<h3>The Case For EMLC</h3>
EMLC has a 30-day SEC of 5.94 percent, which is eye-popping in a world of low and negative sovereign debt yields throughout the developed world. One of the reasons the ETF has struggled in recent weeks is its Mexico exposure.
Latin America&#39;s second-largest economy is EMLC&#39;s second-largest country weight, which has been a drag on the ETF in the wake of Trump&#39;s win because of his harsh rhetoric<a href="http://www.benzinga.com/news/16/11/8722042/a-problem-area-within-a-problem-etf"> aimed at Mexico</a>. Not to mention the peso has been a laggard among emerging currencies this year. On the upside, Mexico carries an investment-grade rating and is historically not as volatile as other emerging economies.
&ldquo;Growth in the market size has been driven primarily by the increased issuance of local currency-denominated sovereign bonds, as well as corporate bonds. The emerging markets corporate debt market alone nearly equals the size of the U.S. high yield bond market. Many foreign investors gravitate towards hard currency sovereign and corporate bonds, typically those denominated in U.S. dollars, to limit currency risk. However, the local currency market far exceeds the hard currency market in size,&rdquo; added VanEck.

There's Still A Case For Emerging Market Bond ETFs

Emerging markets bond exchange-traded funds have been among this year&#39;s best-performing asset classes, a sentiment that rings true for dollar-denominated and local currency funds, such as the Market Vectors Emerging Mkts Local ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>).

	The $2.4 billion EMLC, one of the largest local currency emerging markets bond ETFs, is up 15.2 percent year-to-date, delivering equity-like returns while throwing off a 30-day SEC yield of 5.35 percent. That is more than enough to make investors think twice about developed market bond funds.
<h3>
	Emerging Markets Debt</h3>

	It is easy to understand investors&#39; enthusiasm for emerging markets debt, dollar-denominated or local currency. German and Japanese 10-year sovereigns have negative yields. The comparable U.S. bond yields just under 1.8 percent.

	Investors considering an ETF such as EMLC need to be mindful of developed world monetary policy, particularly the Federal Reserve&#39;s plans for U.S. interest rates.
<h3>
	Considering EMLC, Peers</h3>

	&ldquo;Interest rate volatility was a primary concern in September as the market grappled with the possibility that the major developed market central banks might be on the verge of policy shifts,&rdquo; said VanEck <a href="http:// https://www.vaneck.com/blogs/emerging-markets/emerging-markets-bonds-continue-rally/">in a recent note</a>. &ldquo;The European Central Bank and the Bank of Japan versions of quantitative easing are both under review and the anticipated impact of reversals or tapers led to steeper curves. In the U.S., the Fed remained on hold, as expected, but took a more hawkish tone with regard to the likelihood of a single hike before yearend. Even so, the scaled back rate expectations of Fed governors in the &lsquo;dot plot&rsquo; showed only two potential hikes in 2017.&rdquo;

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	At the end of the third quarter, the Indonesian rupiah, Brazilian real and Polish zloty combined for over 30 percent of EMLC&#39;s currency exposure with those countries combining for over 27 percent of the ETF&#39;s geographic weight.

	While EMLC can be riskier than traditional bond ETFs, it is not major credit risk as the fund devotes more than 56 percent of its weight to bonds with investment-grade ratings. That is more than double the ETF&#39;s exposure to junk bonds.

	The Fed and other factors are likely to affect EMLC going into the end of the year.

	&ldquo;Near term uncertainty will likely come from the approaching U.S. elections, the continued positioning of Organization of Petroleum Exporting Countries (OPEC) members and the resulting impact on oil prices, and the precarious capital positions of some European banks,&rdquo; added VanEck.

	&ldquo;Most significantly, the prospect of a December rate increase in the U.S. will increasingly come into focus. However with a liquidity backdrop that is still very supportive, yields that remain attractive, and fundamentals that continue to improve, we believe that the investment case for emerging markets debt is not likely to be diminished with the next rate hike.&rdquo;

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Emerging Markets Bond ETFs Continue Delivering

U.S. interest rates reside near historic lows. That situation is worse in many other parts of the developed world where trillions of dollars of negative-yielding sovereign debt can be found. All of that and global investors are showing a fondness for emerging markets assets not seen for a several years.
Essentially, it is a perfect storm for emerging markets bonds this year, and developing world currencies are rebounding, lifting exchange-traded funds such as the Market Vectors Emerging Mkts Local ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>).
<h3>Emerging Markets, Debt And Bonds</h3>
Bonds found in the $2.1 billion EMCL certainly entice when it comes to yield. The 10-year bond in Brazil yield 11.4 percent at the end of July. The same bond in Turkey sported a yield of 9.5 percent. Even relatively steady Chile offers 4.5 percent on its 10-year sovereigns. Brazil, Turkey and Chile, in that order, combine for 16.8 percent of EMLC&#39;s weight. The ETF has a 30-day SEC yield of 5.55 percent.
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&ldquo;Emerging markets debt has attracted investor attention this year, as current low and negative yields in developed markets have led many to look outside of core fixed income asset classes for attractive income. The asset class has benefitted from several tailwinds since the start of the year, including a rebound in commodity prices, a restrained U.S. dollar, and expectations that U.S. interest rates will remain &quot;lower for longer,&quot; even if the Federal Reserve decides to hike rates before the end of the year,&rdquo; <a href="https://www.vaneck.com/blogs/etfs/emerging-markets-debt-whats-behind-huge-inflows-september-2016/">said VanEck in a recent note</a>.
<h3>Investor Enthusiasm And IGEM</h3>
Investors&#39; enthusiasm for emerging markets bonds has helped at least one new ETF with exposure to the asset class: The VanEck Vectors ETF Trust Market Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (NYSE: <a class="ticker" href="/stock/igem#NYSE">IGEM</a>).
IGEM, which is less than two months old, follows the &ldquo;J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index (JPEGIGBB), which is comprised primarily of investment grade U.S. dollar-denominated bonds issued by emerging markets (EM) governments,&rdquo; according to <a href="https://www.vaneck.com/vaneck-vectors/income-etfs/igem/snapshot/">VanEck</a>. The ETF is already home to more than $15 million in assets under management.
&ldquo;In addition to supportive technical and monetary policy, fundamentals appear to be stabilizing, and in many cases, improving in emerging markets economies. With economic growth expected to rise, the International Monetary Fund (IMF) is forecasting that the growth differential between developed markets and emerging markets will increase in coming years. Debt-to-GDP ratios remain well below those of developed markets. Policy reforms such as those in India, Malaysia, and Indonesia are likely to be positive for investors, and support the case for focusing on higher quality sovereign bonds,&rdquo; added VanEck.
IGEM has a 30-day SEC yield of nearly 3.1 percent.
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IGEM

Good Reasons To Love These Bond ETFs

Bonds and fixed-income exchange-traded funds are hot this year, and within that space, emerging markets bond funds are scintillating.
As <a href="http://www.benzinga.com/trading-ideas/long-ideas/16/08/8303402/its-not-all-about-yield-for-em-bond-investors">has been noted</a> throughout the course of this year, the Federal Reserve&#39;s refusal to raise interest rates is capping the dollar&#39;s ability to muster much momentum. In turn, yields are coming down on emerging markets bonds because issuers&#39; external financing needs are not as crimped as they were when the greenback was soaring in anticipation of multiple rate hikes.
<h3>Enticing ETFs</h3>
The two largest emerging markets bonds ETFs each hold dollar-denominated debt and those funds are up an average of 15.5 percent. However, with the dollar weak, that means previously downtrodden emerging currencies are soaring, breathing new life into ETFs that hold emerging markets bonds denominated in local currencies.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/analyst-ratings/analyst-color/16/08/8373757/raptor-pharmaceuticals-another-case-of-mistaken-identity">Raptor Pharmaceuticals: Another Case Of Mistaken Identity</a></bzrelatedlink>
Although such ETFs are usually more volatile than their dollar-denominated counterparts, these funds should reward investors for a little extra risk. For example, the Market Vectors Emerging Mkts Local ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>) is higher by 17.4 percent year-to-date, a significant advantage over its dollar-denominated rivals.
&ldquo;Investors&#39; renewed interest in emerging markets debt amid the yield drought in developed markets is evidenced by the surge in flows this year that accelerated in July. According to J.P. Morgan, during the month, global flows amounted to an estimated $13.7 billion, almost 60 percent of year-to-date flows of $23.3 billion. Inflows of $4.7 billion toward the end of the month exceeded the previous weekly record set earlier in the month. Almost all flows have been into hard currency strategies, with local currency flows slightly positive at $0.7 billion,&rdquo;<a href="https://www.vaneck.com/blogs/emerging-markets/brexit-intensifies-search-yield-emerging-markets-august-2016/"> according to a VanEck note</a>.
<h3>Getting Pumped Over EMLC</h3>
It is easy to understand investors&#39; enthusiasm for emerging markets debt, dollar-denominated or local currency. German and Japanese 10-year sovereigns have negative yields. The comparable U.S. bond yields just over 1.5 percent.
However, as VanEck data noted, the 10-year bond in Brazil yield 11.4 percent at the end of July. The same bond in Turkey sported a yield of 9.5 percent. Even relatively steady Chile offers 4.5 percent on its 10-year sovereigns. Brazil, Turkey and Chile, in that order, combine for 16.8 percent of EMLC&#39;s weight. The ETF has a 30-day SEC yield <a href="https://www.vaneck.com/vaneck-vectors/income-etfs/emlc/snapshot/">of 5.5 percent</a>.
&ldquo;The search for yield seemed to outweigh concerns stemming from events in Turkey, the growth impacts of Brexit, and a decline in current oil prices. Emerging markets corporates had a strong July, returning 1.59 percent largely due to spread tightening. Hard currency sovereigns posted strong July performance of 1.80 percent, outperforming local currency bonds which returned 0.60% in U.S. dollar terms, with currencies impacting performance negatively. Despite the compression in yields, spreads on hard currency sovereigns remain slightly wider versus their 10-year historical average,&rdquo; added VanEck.

An Even Hotter Way To An Already Hot ETF Trade

Put simply, a big reason why investors are flocking to emerging markets bond exchange-traded funds this year is yield. Just look at the iShares JPMorgan USD Emer Mkt Bnd Fd ETF (NYSE: <a class="ticker" href="/stock/emb#NYSE">EMB</a>) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE: <a class="ticker" href="/stock/pcy#NYSE">PCY</a>).
The two largest emerging markets bond ETFs, both which hold dollar denominated debt, have an average 30-day SEC yield of more than 4.5 percent. That is roughly triple the current yield on 10-year U.S. Treasurys.
<h3>Yearning For Yield, But...</h3>
Yield is important, particularly with bond ETFs and in the case of emerging markets bond funds, investors usually find tempting yields due to the conventional wisdom that debt courtesy of a developing world government is riskier than a developed market equivalent. Still, liquidity is an important concern in the bond market and recent data suggest investors lean toward emerging markets bond ETFs they view as sufficiently liquid.
<bzrelatedlink>Related Link: <a href="http://www.benzinga.com/general/education/16/08/8297906/fantastic-yields-and-where-to-find-them-top-3-yields-from-the-dow-30">Fantastic Yields And Where To Find Them: Top 3 Yields From The Dow 30</a></bzrelatedlink>
&ldquo;In the ever evolving trade-off between yield and liquidity however, it seems that investors riding the emerging market bond ETF wave have chosen the latter. This preference for the liquidity is evidenced by the fact that products that investing relatively lower yielding hard currency denominated bonds, such as US dollars, but which carry much less currency risk and liquidity constraints, have seen a 70 percent share of the record $10.3bn that has been invested into the asset class,&rdquo; said Markit <a href="http://www.markit.com/Commentary/Get/03082016-Credit-EM-bond-investors-choose-liquidity-over-yield">in a recent note</a>.&nbsp;
<h3>The Role Of Liquidity</h3>
It is not surprising that investors that prize liquidity would lean toward dollar-denominated ETFs like EMB and PCY. However, the Market Vectors Emerging Mkts Local ETF (NYSE: <a class="ticker" href="/stock/emlc#NYSE">EMLC</a>), one of the largest ETFs holding emerging markets debt denominated in local currencies, is no slouch. EMLC has added over $611 million in new assets this year, or about 20 percent of the total investors have allocated to emerging markets bond funds denominated in local currencies.
As Markit, the trade-off for liquidity means leaving some yield on the table.
&ldquo;Local currency funds have also proved popular. However, the fact that over two thirds of investors are willing to pass up on the 1.43% of extra yield currently offered by the asset class, as gauged by the current difference in weighted average yield to maturity between the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) and the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC), the largest US listed hard and local currency funds respectively, shows that yield isn&rsquo;t everything,&rdquo; said the research firm.
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VanEck J. P. Morgan EM Local Currency Bond ET

Overview

VanEck J. P. Morgan EM Local Currency Bond ET (ARCA:EMLC), Quote.Headers.trade-ideas