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Another Bond ETF Enjoying The Emerging Markets Resurgence

by
June 23, 2016 8:33 am
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With tens of trillions of dollars’ worth of global sovereign debt yielding less than zero percent, ensuring investors will lose money, and scores of other developed markets, including the United States, sporting historically low interest rates, generating income on international sovereign debt is an increasingly difficult endeavor.

Solving A Problem Through ETFs

One way of solving that conundrum is with emerging markets sovereign debt ETFs, which often features far more compelling yields than U.S. and developed markets equivalents. There are some other new ETFs on the scene that can help yield-hungry investors bolster income, including the Cambria Sovereign High Yield Bond ETF (NYSE: SOVB).

More Than The Name Implies

Although SOVB is just four months old, it was one of just a handful ETFs to hit new all-time highs on Wednesday. SOVB is an actively managed fund and not a dedicated emerging markets play. However, at the end of the first quarter, SOVB's emerging markets exposure was substantial with only Australia and New Zealand standing as the ETF's developed markets exposure.

Related Link: Opportunity With An International Bond ETF

As a yield play, SOVB's exposure to those two countries makes sense, because although the central banks in those countries have been lowering interest rates, borrowing costs in New Zealand and Australia are still high relative to most of the developed world.

SOVB “applies the Cambria's core principles of value investing to fixed income by buying and holding attractively priced foreign government bonds with high yield characteristics. While traditional bond funds are often concentrated in the largest debtors, SOVB holds a well-diversified portfolio of liquid sovereign debt,” according to California-based Cambria.

The Sector And A Look Ahead

With emerging markets bonds on the mend, SOVB could prove to be a well-timed launch, as investors revisit the asset class in search of yield. Emerging markets governments and some corporations binge-borrowed in dollars during the various versions of the Fed's quantitative easing programs. It looked smart as the dollar weakened against a plethora of developed and emerging currencies, but those emerging markets borrowers were caught off guard when the dollar started soaring several years ago.

Nearly two-thirds of the 30 issues held in SOVB mature in less than five years or in five to 10 years.

It is easy to understand investors' thirst for developing world debt. As Benzinga reported earlier this month, “A whopping $8 trillion in global investment-grade sovereign debt currently sports negative yields, meaning investors that make those bets will lose money. The World Gold Council adds 40 percent of global sovereign debt sports yields below 1 percent.”

SOVB solves some of the yield issue with a 30-day SEC yield of over 4 percent.