In the three years prior to the summer of 2007, bank bonds maturing in five to 10 years traded at an 11-basis-point (bp)discount to comparable maturity industrials. Since July 2007, these securities averaged a yield premium of 57 bp compared to the broader universe. Today, financials trade at a 15-bp premium.3 In today’s low-yield environment, we view current valuations as a potential opportunity. DM banks are trading at wider spreads while continuing to delever. Additionally, EM banks remain much less battle-tested than many of the hard asset companies, which have navigated the turmoil of growing emerging market economies for many years. Yet they continue to trade at tighter spreads than many large multinationals in the same country of domicile.
While we believe this dynamic to be compelling, being able to express this view is generally difficult for most investors, except institutional money managers. However, both of these themes drive the construction of two of WisdomTree’s corporate bond strategies. In the WisdomTree Strategic Corporate Bond Fund (CRDT), the portfolio maintains an over-weight to DM financials relative to other sectors. In EM, the WisdomTree Emerging Markets Corporate Bond Fund (EMCB) has a 0% weight to emerging market financials in favor of opportunities in basic industrials.4
1Ryan Brist, Western Asset Management, June 2014.
2Source: J.P. Morgan, as of 6/30/14.
3Source: Bank of America Merrill Lynch, as of 6/30/14.
4Source: WisdomTree, as of 6/30/14. Holdings subject to change.
Important Risks Related to this Article
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions.
Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner, or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline. Unlike typical exchange-traded funds, there is no index that these Funds attempt to track or replicate. Thus, the ability of the Funds to achieve their objective will depend on the effectiveness of the portfolio manager. Please read each Fund’s prospectus for specific details regarding each Fund’s risk profile.