Invesco PowerShares, the money management firm best known for its Nasdaq-100 ETF (QQQ), is launching a fundamentally weighted emerging markets local debt ETF that would join a growing segment of the U.S. ETF market anchored by the WisdomTree Emerging Markets Local Debt Fund (ELD).
The PowerShares Fundamental Emerging Markets Local Debt Portfolio (PFEM) is linked to Rob Arnott’s Research Affiliates’ fundamental index methodology, the latest to join an extensive family of RAFI-linked PowerShares ETFs. PFEM will cost 0.50 percent a year, or $50 for each $10,000 invested.
The fund will track the Citi RAFI Bonds Sovereign Emerging Markets Extended Local Currency Index, which comprises locally issued debt from 18 emerging markets economies selected through four fundamental screens:GDP, population, land area and energy use. The bonds are weighted annually according to each country’s composite ranking, according to the most recent prospectus .
PowerShares’ take on emerging market debt will join the likes of WisdomTree’s ELD—the biggest in the space, with some $2 billion in assets—as well as offerings from iShares and Van Eck, to name a few. These funds cater to investor demand for yield-generating strategies, although they bring with them currency exposure risk beyond the usual credit- and maturity-related risks associated with fixed-income investing.
Still, the basic idea behind investing in emerging market local debt is that the region often serves up better debt-to-GDP balances compared with those seen in developed economies today, as well as higher yields than comparable bonds in developed markets. Moreover, owning debt denominated in local currencies allows investors to benefit from any weakening of the dollar against those currencies.
ELD has seen gains of 1.25 percent year-to-date, having now rallied just over 5 percent in the past year. The modest gains have come as investors poured a net of $532 million into the fund since Jan. 1, according to data compiled by IndexUniverse.
For inclusion in PFEM, bonds must have at least one year to maturity and come from a country with a debt rating of at least “CC” according to S'P standards or "Ca" according to Moody’s. Countries like Brazil, China, Czech Republic, Indonesia, Mexico, Poland and Thailand are found in the 18-country mix.
The ETF applies a representative sampling approach to replicating its index, meaning it doesn’t own all of the securities found in the underlying benchmark.
PFEM will also join PowerShares’ other emerging markets strategy, the $2.6 billion PowerShares Emerging Markets Sovereign Debt ETF (PCY), which is a basket of dollar-denominated government bonds that costs 0.50 percent in net expense ratio.
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