Volatility in the developing economies pressured riskier assets at the start of the year, but investment money is slowly trickling back into emerging market debt country-specific exchange traded funds.
Barclays data reveals that foreigners, notably institutional investors, are putting money back into emerging market debt, reports Shuli Ren for Barron’s.
The bottom-up research conducted by Barclays differs from EPFR fund flow data, which shows investors are pulling money out of emerging funds – EPFR mainly tracks retail investors and may not follow emerging market fund managers that started switching putting cash to work.
“When we look at bottom-up high frequency foreign holdings data for Mexico, Hungary, Indonesia, South Africa and Turkey, we get a clearer sign of an improvement,” Barclays analysts Koon Chow and Durukal Gun said in the article. “We estimate that for these five countries (which account for just over 40% of local bond benchmark indices weight), foreign holdings in local bonds rose by USD4.9bn in February, and for the month-to-date in March, their holdings rose an additional USD0.2bn.”
Consequently, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) gained 3.4% and iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB) increased 3% in February as emerging currencies rebounded from the January sell-off. [It’s Not All Bad in Emerging Market Debt ETFs]
EMB tracks U.S. dollar-denominated emerging market bonds, which helps mitigate currency risks. The ETF has a 5.02% 30-day SEC yield and an effective duration of 6.99 years.
LEMB, on the other hand, tracks emerging market debt denominated in the respective local currencies, which may benefit investors if the U.S. dollar depreciates against those currencies. The fund has a 5.14% 30-day SEC yield and an effective duration of 4.08 years.
For instance, the South African rand appreciated 3.8%, Turkish lira gained 2.5%, Indonesian rupiah rose 4.9% and Mexican peso was up 1% in February.
The stronger currencies also bolstered country-specific ETFs like the e iShares MSCI Indonesia ETF (NYSEArca: EIDO) and the iShares MSCI South Africa ETF (NYSEArca: EZA), which gained 10.2% and 7.7%, respectively, over the month. The ETFs track company stocks denominated in the local currencies, so the stronger foreign currencies translates to a stronger return in USD terms. [Interest Increasing in Indonesia ETFs]
For more information on the bond market, visit our bond ETFs category.
Tom Lydon’s clients own shares of EMB.