An Active ETF Alternative For Emerging Markets Bonds

Only a couple of the new exchange traded funds that have come to market this year have proven to be impressive asset gatherers, meaning they have suprassed the supposedly all-important $100 million mark. There are some rookie ETFs that have not topped $100 million in assets under management, but have still proven to be solid additions to the overall ETF fray.

The SPDR DoubleLine Emerging Markets Fixed Income ETF EMTL fits that bill. The SPDR DoubleLine Emerging Markets Fixed Income ETF debuted less than two months ago as part of an expansion that triple the size of the fixed income ETF partnership between Jeffrey Gundlach's DoubleLine Capital and State Street Global Advisors (SSgA), the third-largest U.S. issuer of exchange-traded funds. 

In less than two months on the market, the actively managed EMTL has hauled in nearly $38 million in assets. Combine EMTL's lifespan with the asset-gathering proficiency, or lack thereof, of this year's other infant ETFs and it is fair to say EMTL is doing pretty well on a superficial basis.

More importantly, EMTL offers utility in the current market environment.

“Investors considering an EM exposure to complement a fixed income core may want to do so using an active strategy. For example, the chart below shows the large divergence of returns we’ve seen in the last two years—analyzed in quarterly holding periods—across EM debt disciplines: local and dollar-denominated debt of both sovereigns and corporates. Even though these disciplines are all categorized under EM debt, the return profile in a given quarterly period is quite diverse, reinforcing the idea that not all EM debt is the same,” said State Street Vice President David Mazza in a recent note.

EMTL has a modified adjusted duration of 4.69 years and an average coupon of 5.34 percent. EMTL, which holds over 1,100 bonds. Over 62 percent of those holdings are rated Baa or higher while 37.1 percent are rated below Baa. The new ETF will look to top the JP Morgan Corporate Emerging Market Bond Index Broad Diversified.

Currently, nearly two-thirds of EMTL's regional weight is devoted to Latin America with Colombia, Mexico and Peru combining for nearly 41 percent of the new ETF's lineup. India is the only country in EMTL's top seven country weights that is not a Latin American nation.

Active management helps EMTL be a departure from the standard emerging markets debt ETF.

“Many EM bond ETFs weight the bonds in the fund by the amount of debt outstanding. That means the more debt a country or company has, the bigger its weight in the fund. However, EMTL seeks to provide high total return by diversifying across regions, countries, sectors, issuers, durations and liquidity structures,” adds Mazza.