PCY attempts to reflect the DB Emerging Market USD Liquid Balanced Index, which follows liquid emerging market government bonds that are denominated in U.S. dollars. The fund has $1.4 billion in assets, an expense ratio of 0.50% and yields 5.5%. The ETF is also very well balanced among emerging market countries as it employs an equal-weight strategy. For instance, top country allocations include Columbia at 4.9%, Indonesia 4.8%, Qatar 4.7%, Vietnam 4.2% and Russia 4.2%, to name a few.
WisdomTree and Van Eck launched their own emerging market debt ETFs in 2010. These newer ETFs follow the local currency and investors should be aware that potential foreign currency fluctuations may affect returns – if the foreign currency appreciates relative to the dollar, the funds will be positively influenced by the foreign currency conversion rate.
The WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) is an actively managed ETF that holds a basket of debt denominated in the local currencies of the emerging market countries from where the securities came from. ELD selects bonds from countries based on low debt-to-GDP, large foreign reserves, positive growth and adequate inflation levels, among others. The fund has $1.1 billion in assets, an expense ratio of 0.55% and yields 4.7%. Some of its largest country allocations include Brazil, Mexico, Indonesia and Malaysia.
The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) also tries to reflect movements in local currency bonds issued by emerging market governments. The fund has $509.4 million in assets, an expense ratio of 0.49% and yields 5.8%. Top country allocations include Malaysia 10%, Brazil at 10%, Poland 10%, South Africa 10% and Mexico 10%. The ETF caps holdings at 10% to help limit the influence any single region may have on the overall portfolio.
The iShares Emerging Markets Local Currency Bond (NYSEArca: LEMB) is the latest addition to the asset category. LEMB tries to reflect the Barclays Capital Emerging Markets Broad Local Currency Bond Index, which is a market-value-weighted index that follows the performance of emerging market sovereign debt denominated in their local currencies. The fund has $29.3 million in assets, an expense ratio of 0.60% and provides a yield of 5.6%. Top country allocations include Korea 20.1%, Brazil 14.7%, Mexico 6.9%, Poland 5.3% and Colombia 4.6%. LEMB leans toward emerging markets with more developed and liquid bond markets.
Investors seeking a more narrowly focused emerging market bond ETF may consider the WisdomTree Asia Local Debt Fund (NYSEArca: ALD), which tries to reflect local debt denominated in currencies of Asia Pacific countries, excluding Japan. The fund has $398.5 million in assets, an expense ratio of 0.55% and a yield of 2.2%. Top country allocations include Thailand, Malaysia, Indonesia, Australia and South Korea. ALD is similar to WisdomTree’s Emerging Markets Local Debt ETF ELD, except it only holds bonds from Asia Pacific countries.
Full disclosure: Tom Lydon’s clients hold shares of EMB.