BlackRock is the latest exchange traded fund provider to introduce an emerging markets local currency ETF.
The iShares Emerging Markets Local Currency Bond Fund (NYSEArca: LEMB) will compete with WisdomTree Emerging Markets Local Debt (NYSEArca: ELD), Market Vectors Emerging Market Local Currency Bond (NYSEArca: EMLC), and SPDR Barclays Capital Emerging Market Local Bond (NYSEArca: EBND).
LEMB tries to reflect the performance of the Barclays capital Emerging Markets Broad Local Currency Bond Index, which measures a basket of emerging market sovereign debt. The fund holds 42 bonds and has an expense ratio of 0.60%, which is the highest among its competitors.
Top country allocations include: South Korea 20.53%, Brazil 13.56%, Other 8.05%, Mexico 6.90% and Poland 6.26%.
LEMB has a slightly lower average duration of 3.94% and lower average coupon of 6.12%.
Potential investors need to be aware of the currency risks when investing in these types of funds. Since the funds have holdings denominated in foreign currencies, an investor may lose money if the foreign currency depreciates against the dollar.
Emerging market bonds, though, offer investors the opportunity to diversify and boost yields in fixed-income portfolios, which is rather appealing considering the record low yields on U.S. debt. However, potential investors should note that emerging market investments tend to have greater risk.
“Emerging markets have increased political and economic risks that make them more susceptible to default. For this increased risk, investors get higher relative yields,” says Morningstar analyst Timothy Strauts.
“In the past few years, emerging-markets equities and bonds have become a larger portion of investors’ portfolios. As of the end of September 2011, the emerging-markets debt category has seen $11.2 billion in new assets this year,” he added. “This demand is because of the tremendous economic growth in emerging markets compared with meager growth from the developed world. This is tremendous growth for such a small portion of the fixed-income market.”
WisdomTree Emerging Markets Local Debt
For more information on international sovereign debt, visit our international Treasury bonds category.
Max Chen contributed to this article.