Van Eck Plans Emerging Market Bond ETF for Higher Yields


Though the U.S. market seems to be recovering, the improvement has been extremely sluggish and investors remain yield hungry thanks to a still-low interest rate environment in the nation. Several other developed regions including Europe, Japan and Australia are also under the ultra-low interest regime. This is prompting investors to look for better options to satisfy their thirst for yields, and emerging markets come across as viable options.

Gauging this market sentiment, Van Eck recently planned a new ETF targeting the emerging market bond segment. The issuer has not yet disclosed the ticker, but noted that the product will be trading on the NYSE’s Arca exchange, if approved (read: Global X Plans Emerging Market Bond, Commodity ETFs).

Proposed Fund in Focus

The planned fund will track the Market Vectors emerging markets corporate bond index. The benchmark includes USD-and-Euro-denominated corporate and quasi-sovereign emerging market bonds that have more than seven years remaining to maturity.

Currently, this includes over 50 nations, including countries in South America, Southeast Asia, the Middle East, and Eastern Europe.  As of May 30, 2014, the Index had 1,323 bonds from 594 issuers. The weighted average maturity of the Index was 7.61 years. Expense ratio is yet to be disclosed.

How Does it Fit in a Portfolio?

Apart from being an intriguing option for investors searching for high yields, this fund will be immune to any emerging market currency downslide against the greenback since it would zero in on dollar-and Euro denominated bonds.

Currency risks have become a huge concern for emerging nations since the initiation of taper talk in May 2013. Having targeted an intermediate duration profile, the ETF should yield higher than the ones focusing on short-term debts. However, this exposure profile elevates the level of interest rate risk.

Can it Succeed?

There are quite a few exchange-traded products already present in the emerging market bond space, so it could be difficult for the proposed fund to build up assets. This is particularly true if investors consider the level of popularity that emerging markets lost in recent times in the wake of QE taper. Still, the space has soared this year with every product in the segment adding gains on a year-to-date basis.

The space is presently topped by iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB), Emerging Markets Sovereign Debt Portfolio (PCY) and Market Vectors Emerging Markets Local Currency Bond ETF (EMLC). The trio has returned about 7.2%, 9.8% and 4.7% so far this year (read: Emerging Market ETFs See Inflows: 3 ETFs to Pick).

EMB charges investors 60 basis points a year in fees, while it has over $4.5 billion in assets under management. However, the fund has a significant component in long-term holdings, while it has the majority of its assets in intermediate term debt.

With about $2.2 billion in assets, PCY charges about 50 bps in fees while EMLC’s expense ratio stands at 50 bps. So, to attract enough investor attention, the proposed product needs to charge competitively should it obtain approval (read: WisdomTree Launches Two High Yield Bond ETFs).

Bottom Line

In a nutshell, if interest rates start to move higher in the U.S. next year and emerging market currencies start to fall against the greenback, investors will seek such products more aggressively. In such a situation, the newly planned product might find a decent following if people are looking for an emerging market flavor in their bond ETF holdings.     

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