Emerging Market Bond ETF: Higher Yield, Less Debt
November 19th, 2012 at 8:43am by Tom Lydon
While the U.S. and many other developed markets have low interest rates, yield starved investors will need to expand their horizons to generate income. For instance, given the attractive rates in developing economies, emerging market bond exchange traded funds offer an opportunity.
The benchmark 10-year U.S. Treasury bond yields about 1.60%, whereas the average coupon of the emerging market sovereign bond is around 5% because they are associated with the riskier “emerging market” status, writes Benjamin Shepherd for Seeking Alpha.
Moreover, the emerging markets may arguably pose as a lesser credit risk. Gross public sector debt as a percentage of the U.S., Europe and Japan’s GDP is around 110%, compared to the less than 50% of Latin America and 30% in emerging Asia and Europe.
Shepherd suggests the Market Vectors Emerging Market Local Currency Bond ETF (NYSEArca: EMLC) as a good option to gain exposure to emerging market debt. EMLC holds sovereign fixed-rate bonds denominated in the local currency, so investors will be subject to currency risks – the fund can experience an added boost if the local currency appreciates against the dollar. EMCL has a 0.47% expense ratio and a 5.03% 30-day SEC yield. [Six Emerging Market Bond ETFs with Attractive Yields]
The ETF comes with a good mix of investment and non-investment grade emerging market bonds, with a debt rating breakdown of investment grade A 28.4% and BBB 32.5%, along with speculative grade BB 16.9%.
Country allocations include Brazil 10%, Poland 10%, South Africa 10%, Mexico 10%, Malaysia 9.1%, Turkey 8.3%, Indonesia 7.9%, Russia 7.6%, Thailand 6.0%, Hungary 5.3%, Colombia 3.9%, Peru 3.1%, Nigeria 3.0%, Chile 3.0% and Philippines 3.0%.
Shepherd points out that the majority of the country holdings have debt-to-GDP ratios at or below 40%. Additionally, the fund’s portfolio countries could experience an economic expansion of 5% or more this year and add another 6% in 2013 as the economies are relatively insulated from the problems in the developed world.
For more information on bonds, visit our bond ETFs category.
Max Chen contributed to this article.
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.