Go Local With Emerging Market Bond ETFs - Top Yielding ETFs
December 15 2011 - 4:17AM
Zacks
If one thing sticks out about 2011 for most investors, it is the
broad fears that struck the sovereign bond market throughout the
year. Both European and American bonds faced issues in the period
as worries over downgrades in the U.S. and outright default in
Europe dominated the headlines for much of the year. While U.S.
government bonds have managed to rally despite this news, many
European securities have not been so lucky, pushing yields to
levels not seen in the euro zone era.
In light of these issues, many investors have decided to take a
closer look at emerging market bonds for more diversified exposure
in their bond holdings. For investors seeking access to this area,
there are a number of choices including regional ETFs as well as
broad funds that target a wide range of countries around the globe.
In this global bond ETF space, investors have another choice to
make as well; dollar denominated or local currency-based bonds (see
ETFs vs. Mutual Funds).
Although the dollar has strengthened in recent weeks thanks to
broad European fears, one has to believe, given the poor fiscal
fundamentals of the nation, that the dollar could be headed lower
in the years ahead. For these investors, a purchase of a
locally-denominated bond ETF could be ideal as it could provide
capital appreciation, a solid yield, as well as gains from emerging
market currency appreciation. If the dollar weakens, this could
lead to an extra boost in gains for U.S. investors even if emerging
market bond performance is otherwise flat (read Three Outperforming
Active ETFs).
Thanks to these potential positives, it could be worthwhile to
take a look at any of the following ETFs as an interesting way to
diversify bond holdings. While the products may not do that well if
European turmoil continues in the near term, they seem poised for
strong long-term performance as a result of the robust fundamentals
underlying these nations and their fiscal positions. Most countries
in these funds have debt-to-GDP that is a fraction of their Western
counterparts suggesting that they may be safer than you think for
bond exposure. Add in the higher yields that stretch pretty much
across the board—none of the funds on this list yields less than
5%-- and an emerging market bond ETF could be an excellent choice
for most investors.
iShares Emerging Markets Local Currency Bond Fund
(LEMB)
This relatively new fund seeks investment results that
correspond generally to the price and yield performance, before
fees and expenses, of the Barclays Capital Emerging Markets Broad
Local Currency Bond Index. This benchmark seeks to give investors
broad exposure to a basket of sovereign bonds from emerging markets
that are denominated in a nation’s home currency. The product has
44 securities in total, charges investors 60 basis points in fees
and has just under $30 million in assets under management (see
India ETFs: Behind The Crash).
The product is heavily exposed to South Korean bonds (20%) which
are closely followed by Brazilian bonds which make up about 13.6%
of total assets. Other countries rounding out the top five include
Mexico, Poland, and Thailand, suggesting that the product has a
good level of geographic diversification. In terms of fundamentals,
the effective duration of the ETF is just under four years although
it should be noted that roughly 10% of the bond fund’s portfolio
consists of securities that mature in at least 15 years. Despite
the product’s tilt towards short-term securities, LEMB does pay out
a decent yield to investors, offering up payouts of close to 5.3%
in 30 Day SEC Yield terms.
Market Vectors Emerging Market Local Currency Bond ETF
(EMLC)
This bond ETF looks to replicate the price and yield performance
of the J.P. Morgan GBI-EMG Core Index. This benchmark provides
investors direct exposure to local currency bonds issued by
emerging market governments around the world. EMLC has just over
170 securities in its portfolio, has a gross expense ratio of 49
basis points and has amassed close to half a billion in assets
since its launch in the summer of 2010 (read German Bond ETFs In
Focus).
Unlike LEMB, this fund imposes a 10% cap on the weighting
allocated to a particular nation, ensuring that assets are well
spread throughout the countries. Four nations currently make up 10%
of total assets—Brazil, Poland, South Africa, and Mexico, while
Malaysia and Turkey both have bonds that constitute at least 9% of
the fund as well. Thanks to the broad trend towards safer assets,
EMLC has underperformed broad bond indexes so far in 2011, losing
about 8.8% year-to-date compared to a gain of about 4% for AGG.
However, it should be noted that the payout for this product is
quite impressive, coming in at 6.4% in 30 Day SEC yield terms.
SPDR Barclays Capital Emerging Market Local Bond ETF
(EBND)
This product from State Street also looks to provide exposure to
emerging market government bonds giving investment results that
correspond to the price and yield performance of the Barclays
Capital EM Local Currency Government Diversified Index. This
benchmark looks to include government bonds issued by developing
nations, in local currencies, that have a remaining maturity of one
year or more and are rated B3/B-/B- or higher. In addition, the
securities in the index must be fixed-rate and have certain minimum
amounts outstanding, depending upon the currency in which the bonds
are denominated. Much like EMLC, close to 170 securities are in
this fund’s portfolio but the product does charge more in fees—50
basis points—and have less in assets-- $47 million—than its Van Eck
counterpart (see Top Three High Yield Real Estate ETFs).
For individual country holdings, this product shares some
similarities with both of the aforementioned ETFs. South Korea and
Brazil take the top two spots, combining to make up close to 25% of
the portfolio, while Mexico, Poland, and Malaysia round out the top
five. The product is heavily concentrated in short-term securities
with close to 55% of the portfolio maturing within five years,
pushing the duration down to 4.6 years. Since launching
earlier this year, the product has lost about 2.2% but pays out
close to 5.6% in 30 Day SEC yield terms. Both of these figures,
along with its expense ratio and AUM, put it in the middle of the
back for local currency emerging market bond ETFs.
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