Finding the Best ETFs for Emerging Market Bonds
September 13th at 6:17am by Tom Lydon
Bond assets play an important role in any traditional investment allocation strategy, but now, investors may utilize exchange traded funds to diversify away from U.S. debt and gain exposure to emerging market bonds. Emerging market bond ETFs are also offering attractive yields.
In the emerging market bond ETF space, the iShares JPMorgan USD Emerging Markets Bond Fund (NYSEArca: EMB) is the largest option available, with about $5.5 billion in assets under management. The fund tries to reflect the performance of the J.M. Morgan EMBI Global Core Index, which is market-value-weighted based on countries with the most debt and is comprised of U.S. dollar denominated emerging markets bond securities. [Emerging Market Bond ETFs with Attractive Yields]
EMB has a 0.60% expense ratio, a 3.68% 30-day SEC yield, average maturity of 12.1 years and an effective duration of 7.7 – each 1% rise in rates will diminish EMB’s price by about 7.7%.
Credit quality allocations include AA 1.7%, A 6.0%, BBB 46.7%, BB 15.7% and B 13.4%. Country allocations include Brazil 7.4%, Russia 7.1%, Mexico 7.0%, Philippines 6.8%, Turkey 6.7%, Indonesia 6.5%, Venezuela 4.9%, Colombia 4.9%, Peru 4.2% and Poland 4.1%.
Additionally, the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) follows the DB Emerging Market USD Liquid Balanced Index, which is equally weighted among 22 emerging market countries and holds a basket of U.S. denominated emerging market debt.
PCY has a 0.50% expense ratio, a 4.47% 30-day SEC yield, an average maturity of 15.4% and an effective duration of 9.45.
Credit quality allocations include AA 4.5%, A 8.2%, BBB 39.5%, BB 30.6%, B 11.8% and below B 4.4%. Country exposure include Bulgaria, Brazil, Columbia, Croatia, El Salvador, Hungary, Indonesia, South Korea, Lithuania, Mexico, Panama, Peru, the Philipppines, Pakistan, Poland, Qatar, Russia, South Africa, Turkey, Ukraine, Uruguay, Vietnam and Venezuela.
More recently, the fund industry has come out with emerging market bond ETFs that are denominated in their local currencies. In comparison to the US dollar-denominated funds, the newer ETFs include a heavier exposure to investment grade debt. Additionally, it should be noted that these ETFs will be exposed to currency risks – if the foreign currency depreciates, your ETF will also take a hit, but an investor stands to benefit if the U.S. dollar begins to weaken.
The iShares Emerging Markets Local Currency Bond Fund (NYSEArca: LEMB) tracks the Barclays Emerging Markets Broad Local Currency Bond Index, which uses a market value-weighted methodology that weights holds emerging market sovereign debt that is denominated in the issuer’s own domestic currency.
LEMB has a 0.60% expense ratio, a 4.59% 30-day SEC yield, an average maturity of 6.06 years and a 4.19 effective duration.
Credit ratings include AA 4.3%, A 28.8%, BBB 6.8% and BB 5.2%. Top country allocations include South Korea 20.8%, Brazil 11.7%, Mexico 7.6%, Poland 6.2%, South Africa 4.5%, Russia 4.5%, Czech Republic 4.4%, Malaysia 4.4%, Thailand 4.4% and Turkey 4.4%.
The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) tries to reflect the performance of the J.P. Morgan GBI-EMG Core Index, which only includes fixed-rate bonds with a maturity of over 13 months and each country weighting is capped at 10%.
EMLC has a 0.47% expense ratio, a 5.08% 30-day SEC yield, an average maturity of 5.89 year and an effective duration of 6.75.
Credit rating allocations include AAA 5.8%, AA 0.4%, A 35.6%, BBB 30.8% and BB 11.8%. Country allocations include Brazil 10%, Poland 10%, South Africa 10%, Mexico 10%, Malaysia 9.6%, Turkey 9.1%, Indonesia 8.2%, Russia 7.4%, Thailand 6.3%, Hungary 5.7%, Colombia 4.3%, Peru 3.5%, Chile 3.0% and Philippines 3.0%.
The SPDR Barclays Capital Emerging Markets Local Bond ETF (NYSEArca: EBND) follows the Barclays Capital EM Local Currency Government Diversified Index.
EBND has a 0.50%, a 4.74% 30-day SEC yield, an average maturity of 6.62 years and a 4.82 duration.
Credit ratings include Aaa 2.4%, Aa 18.4%, A 27.6%, Baa 37.5% and below Baa 12.7%. Country weightings include Brazil 12.6%, South Korea 12.3%, Mexico 8.9%, Poland 7.9%, Malaysia 6.0%, Colombia 4.8%, South Africa 4.7%, Russia 4.7%, Czech Republic 4.7%, Turkey 4.6%, Indonesia 4.5%, Philippines 4.5%, Thailand 4.5%, Israel 4.4%, Hungary 3.6%, Egypt 3.2%, Peru 2.2% and Chile 1.8%.
The WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) is an actively managed fund. The fund managers favor countries that maintain healthy balance sheets.
ELD has a 0.55% expense ratio, a 3.96% 30-day SEC yield, an average 5.38 years to maturity and an effective duration of 4.45.
Credit qualities include AAA 12.8%, AA 3.1%, A 39.5%, BBB 21.5% and BB 12.0%. Country allocations include Mexico 10.5%, Brazil 10.4%, Malaysia 10.2%, Indonesia 10.1%, South Africa 7.2%, Poland 7.1%, Russia 7.1%, Thailand 6.9%, South Korea 6.9%, Turkey 6.9%, Chile 3.4%, Philippines 3.4%, Peru 3.4%, Colombia 3.4% and China 3.4%.
For more information on bond funds, visit our bond ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own EMB.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.