It has been a rough year for emerging markets bonds ETFs, both of the dollar-denominated and local currency varieties. The iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB), the largest emerging markets bond ETF, ranks among the 10 worst ETFs in terms of 2013 outflows.
EMB is down 7.1% year-to-date while the rival PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) is off 9.3% and those numbers are with the benefit of Wednesday’s Federal Reserve no tapering-induced rally. Still, developing countries offer room for higher credit ratings and stronger balance sheets than their developed world peers, so there could be signs of hope for developing world debt. [For the Brave, EM Bond ETFs Offer Opportunity]
In a sign that pop culture could, and it is just speculation, impact emerging markets bond ETFs down the road, Armenia is issuing so-called “Kardashian bonds.” Perhaps that will stoke renewed interest in developing world debt funds. The sale of the bonds, named for the ubiquitous family of reality television fame and Armenian heritage, is Armenia’s first international sovereign debt sale, reports Luke Smolinski for the Financial Times.
There appears to be robust demand for the Kardashian bonds because Armenia was able to lower the yield on the issue to 6.25% from 6.375%, the FT reported. At 6.25%, the Kardashian bonds yield 90 basis points more than the 30-day SEC yield of PCY.
The Kardashian bonds are the latest signs of Armenia’s efforts to open its capital markets to foreign investors. Earlier this year, the central bank allowed dollar-denominated corporate bonds from Armenian issues to be traded on NASDAQ OMX Armenia.
There are risks that will be associated with the Kardashian bonds and none really have anything to do with the fact that “Keeping Up With The Kardashians” is not exactly solid financial markets coverage. Rather, Armenia has a BB-, or junk credit rating from Fitch Ratings. Moody’s Investors Services rates Armenian sovereign debt Ba2 with a negative outlook, according to Trading Economics.
Additionally, Armenia is not an emerging market. It is classified as a frontier market, which implies a higher degree of risk and could limit the potential ETF destinations for the Kardashian bonds if the bonds find their way into any ETFs at all. [Middle East Exposure Supports Frontier ETFs]
That said, EMB does feature some slight exposure to frontier markets such as Argentina, Ukraine and Vietnam. The ETF also has some exposure to other Eastern European nations like Hungary, Romania and Serbia. Hungary, Croatia, Lithuania, Lativia and Romania combine for about 24% of PCY’s weight, but the majority of the holdings in both ETFs are rated investment-grade.
The iShares Emerging Markets High Yield Bond ETF (NYSE: EMHY) could be a possible destination for the Kardashian bonds because that ETF offers exposure junk-rated, dollar-denominated debt, some which hails from frontier and Eastern European issuers. Again, at this juncture, it is just speculation about what ETFs, if any, could make room for the Kardashian bonds.
iShares Emerging Markets High Yield Bond ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EMB and EMHY.