The largest Emerging Markets Bond ETF in terms of assets under management, EMB (iShares JP Morgan USD Emerging Markets Bond, Expense Ratio, 0.60%) has seen some redemption flows in recent sessions, and amid the unrelenting selling pressure in EM based countries including Brazil, South Korea, and China lately, we believe that the outflows may continue in the near term.
EMB has seen more than $200 million leave the fund recently, but keep in mind that its total asset base is a hefty $5 billion.
Trading volume has also been off the wall (and in some cases, very wide intraday ranges have occurred in compressed periods of time) in not only EMB, but related EM Bond focused products, namely PCY (PowerShares Emerging Markets Sovereign Debt, Expense Ratio 0.50%), and ELD (WisdomTree Emerging Markets Local Debt, Expense Ratio 0.55%).
EMLC (Market Vectors Emerging Markets Local Currency Bond, Expense Ratio 0.47%) is another one to talk about in this space given the recent action in the category.
It was not long ago, the beginning of May where products such as EMB were touching new highs (as yields fell lower and lower) amid the great race for higher yields in portfolios among institutional managers.
The climb up was steady, but the reckless selling that has been present in recent sessions accompanied by very wide intraday “gap down” ranges, has caused concern apparently among long holders, exacerbating the selling pressure.
At these levels, the true “valuation based” and fundamental bond managers will shine, as they can quickly examine the underlying paper in such portfolios and quickly figure out which of these EM portfolios is irrationally depressed in value only due to the broad Fixed Income selling out there brought on by Bernanke and company’s comments earlier this week.
With EMB’s yield rising to 4.63% at this juncture, these products may be in more play than ever given the mass dislocation and apparent disagreement on valuation that the market is seeing currently in terms of Government and Corporate Bond issues from EM based countries like the Philippines, Russia, Peru, Indonesia, and Colombia to name a few (current top holdings of EMB).
As one might expect, equity carnage in the EM markets has rippled over into the FI space as well and it has been difficult at times in market distress to effectively liquidate EM bond portfolios absent price impact, thus the large intraday ranges recently. This environment perhaps creates even more trading opportunity at these levels, if not just a massive surge in volatility.
iShares JP Morgan USD Emerging Markets Bond
For more information on Street One ETF research and ETF trade execution/liquidity services, contact Paul Weisbruch at pweisbruch@streetonefinancial.com.
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