There is almost always plenty to talk about in the world of exchange-traded funds. Two of this year's more prominent topics include the resurgence of emerging markets debt and the ongoing struggles of many new ETFs, although there is no shortage of such funds.
Looking Into EMTL
While the field of emerging markets bond ETFs was somewhat crowded prior to this year, the actively managed SPDR DoubleLine Emerging Markets Fixed Income ETF EMTL is off to a decent start, having accumulated nearly $40 million in assets since its April debut.
EMTL has a modified adjusted duration of 4.69 years, an average coupon of 5.34 percent and 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 JPMorgan Corporate Emerging Market Bond Index Broad Diversified.
While the same cannot be said of all new ETFs, EMTL's debut was well-timed. The ETF came to market during an environment where investors are embracing emerging markets assets for the first time in several years and when anemic developed world bond yields are increasing the allure of emerging markets debt. Actually, emerging markets debt is often the more desirable destination than equities.
“Over the past ten years, EM debt has more than doubled the return of EM equity, but with only one third the amount of volatility,” said State Street Vice President David Mazza in a recent note. “While investors often assume that EM debt has the same risk and return profile as US high yield, that is far from the case. EM debt includes both investment-grade (IG) rated debt and below-investment-grade rated debt. More than 60 percent of outstanding EM debt was investment grade at the end of 2015 — up from 18 percent in 1998.”
EMTL does not present investors with significant credit risk as about 62 percent of its combined weight is rated Aa, A or Baa. Mexico, India and Chile combine for about a third of EMTL's geographic lineup.
While U.S. interest rates are often viewed as potential hurdle for emerging markets debt, it cannot be ignored that central banks in Mexico and Colombia, another 10 percent of EMTL's weight, among others, have boosted borrowing costs this year.
Additionally, this asset class is one where active management can work in investors' favor.
“This creates a prime opportunity for active managers with an understanding of emerging market debt risk and return to help investors navigate the more complicated EM debt environment and select individual bonds to hold in a portfolio,” added Mazza.
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