Exchange traded fund investors who want to gain exposure to emerging market debt, along with the attractive yields the space offers, should take a look at the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY).
“PCY ranks favorably on a variety of performance analytics, risk considerations and cost factors,” Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, said in a note.
Emerging market bonds are being supported by the ongoing low-yield environment. According to the S&P Investment Policy Committee, the latest growth and inflation forecasts out of the Federal Reserve was not any different from figures reported back in June, which suggested that interest rates may remain lower for longer, with the yield on 10-year Treasuries still hovering around a depressed 1.6%.
“We think emerging market debt products have garnered attention in 2016, as they generally sport relatively appealing yields,” Rosenbluth said.
However, investors shouldn’t just blindly pick any emerging market debt strategy. According to the SPIVA Mid-2016 scorecard from the S&P Dow Jones Indices, only 11% of active EM bond funds outperformed the Barclays Emerging Markets Index for the three-year period ended June 2016, which suggests investors are better off with a passive, index-based strategy.
Alternatively, investors should look to low-cost ETF options, like PCY. PCY comes with a 0.50% expense ratio, which is below the Lipper emerging market hard currency debt peer average of 1.2%. The PowerShares emerging bond ETF has generated a three-year annualized total return of 8.9% through September 26, compared to the 3.5% average mutual fund’s gain. PCY also comes with a 8.97 year duration and a 4.75% 30-day SEC yield.
“In a low-rate environment, we think this ETF is a strong one,” Rosenbluth said.
PCY tries to reflect the performance of the DB Emerging Market USD Liquid Balanced Index, which tracks U.S. dollar-denominated government bonds issued by 22 developing economies.
Top country weights include Venezuela 4.2%, Brazil 3.8%, Colombia 3.8%, El Salvador 2.8% and Indonesia 3.6%.
While the emerging markets may be associated with greater risks, the fund’s portfolio includes quality debt. Investment-grade debt allocations include AA 6%, A 9% and BBB 40%, along with speculative-grade BB 21%, B 17% and CCC 4%.
For more information on the fixed-income market, visit our bond ETFs category.