We’re hovering around the one-year anniversaries for two emerging market bond exchange traded funds (ETFs). While it’s been a challenging year around the globe, these funds have made their own contributions to ETF investing.
Both the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) and the iShares JP Morgan USD Emerging Market Bond Fund (EMB) have given investors inexpensive access to markets that were hard to gain exposure to and at a decent price.
Kyle Walker for Index Universe says that the other major appeal of both ETFs is their low correlation to U.S. markets over longer periods and the potential of equity-like returns.
Walker has found that the funds have a low, long-term correlation to the S&P 500, with 0.57 for PCY and 0.59 for EMB. However, this year that isn’t the case, because of a major sell-off and widespread global credit problems. PCY is down 25.2% year-to-date, while EMB is down 14.9%. This year has seen many investors running from commodity-based countries, as well as high-yielding and high-risk debt portfolios.
EMB’s and PCY’s holdings are dollar-dominated, so the underlying debt holdings are issued in U.S. dollars. This removes a certain level of volatility that changes in currency can cause, while at the same time removing any ‘falling-dollar hedge’ from the funds.
Both funds carry primarily government-issued debt, known as “sovereign debt.”
PCY is more concentrated, wtih 25 holdings. The countries are equally weighted along with all issues within in country, so as to avoid overweighting countries with a greater debt burden. EMB holds 40 issues and carries some nonsovereign debt. Within its index, each country with higher debt is limited and the excess is reallocated to those with lower debt.