Just over a year ago, the Vanguard Emerging Markets Government Bond ETF (NasdaqGS: VWOB) entered the crowded arena of emerging markets fixed income exchange traded funds.
What looked like poor timing when VWOB debuted in June 2013 (several emerging markets bond ETFs were among the worst offenders in terms of 2013 outflows) has proven to be anything but. VWOB had almost $291 million in assets under management at the end of the second quarter, indicating the fund had more than doubled in size from the $144.8 million in AUM it had in mid-December 2013. [These New ETFs Have Quickly Gained Assets]
VWOB has benefited as investors have returned to emerging markets bond ETFs in search of yield. Fueled by declining Treasury yields and a spate of new issuance, VWOB’s primary rivals, theiShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), have added over $1.1 billion combined this year. [EM Bond ETFs Firm as Issuance Soars]
Emerging markets borrowers sold over $260 billion in new debt in the first half of this year with $60 billion coming from sovereign borrowers and $200 billion from corporations, Reuters reports, citing J.P. Morgan data.
With a yield in the area of 4%, VWOB has returned just over 4% this year, a solid showing when considering the ETF has had to contend with sovereign ratings downgrades to two of its largest country weights. Russia and Brazil, a combined 21.7% of VWOB’s weight, have both endured credit downgrades this year. VWOB an 11.2% allocation to dollar-denominated Russian debt. [Russia ETFs Fall After S&P Downgrade]
Even with those downgrades, VWOB’s credit quality is heavily investment-grade. A combined 67.3% of the fund’s 658 holdings are rated Aa, A or Baa, according to issuer data.
VWOB has an average duration of 6.6 years and a yield to maturity of 4.6%.
Still, there are risks to consider regarding VWOB’s Brazil and Russia exposure. Russia’s central bank has the scope to further raise interest rates as it has three times in the past six months. Traders betting on a decline in Brazilian rates likely need President Dilma Rousseff to lose her reelection bid in October for the dream of lower rates in Latin America’s largest economy to be realized.
VWOB does have some avenues for combatting any further weakness in Russian debt, including its combined 11% weight to Mexico and the Philippines. Speculation has increased the Philippines could earn another credit upgrade, lifting the country further into investment-grade territory while some analysts view Mexican debt as attractive relative to other highly-rated emerging markets issues.
Vanguard Emerging Markets Government Bond ETF
Tom Lydon’s clients own shares of VWOB.