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Another Colombia Upgrade Could Help These ETFs

Colombia, South America’s second-largest economy, could see its sovereign debt rating climb further into investment-grade territory as Moody’s Investors Service sees signs of potential upgrade.

Moody’s senior analyst Mauros Leos told Bloomberg Colombia shares traits with countries that have slightly higher ratings. The ratings agency currency rates Colombia Baa3, the lowest investment grade offered by Moody’s.

Standard & Poor’s rates Colombia BBB, higher than the BBB- the ratings agency lowered Brazil and Russia to earlier this year. [ETFs Deal With Brazil Downgrade]

Many emerging markets bond ETFs are dominated by Brazilian and Russian debt, but there is a chance Colombia will be a larger part of some of those funds in the future. In March, J.P. Morgan said it plans to increase Colombia’s weighting in the GBI-EM Global Diversified Index to 8.05% from 3.24% while the country’s weight in the GBI-EM Global Index could more than triple to 5.6% from 1.81%. [More Colombia in Your EM Bond ETF]

Currently, the Market Vectors Emerging Markets Aggregate Bond ETF (EMAG) features one of the larger weights to Colombia sovereign debt at 4.9%, making Colombia the ETF’s seventh-largest country allocation. EMAG has a 30-day SEC yield of 4.21% and a modified duration of 5.14 years.

Under Moody’s ratings, Colombia is rated the same as India, Indonesia and Turkey and one notch below Brazil and Peru, according to Bloomberg. Among South American economies, only Peru’s expected to grow faster than Colombia’s this year.

Colombia is the ninth-largest country weight in the actively managed WisdomTree Emerging Markets Local Debt Fund (ELD). Although ELD devotes over 18% of its weight to Brazil and Russia, the ETF has gained 5% over the past 90 days as risk appetite has increased and emerging markets currencies have firmed. [Risk on Environment Lifts EM Bond ETFs]

Nearly three-quarters of ELD’s holdings are rated A or BBB. The ETF has a 30-day SEC yield of 5.32% and an effective duration of 4.97 years.

Colombia is the fourth-largest country weight in the iShares Emerging Markets Local Currency Bond ETF (LEMB) , though that is barely more than half the weight the ETF devotes to Mexico and less than a third of Brazil’s weight in the fund. LEMB has a 30-day SEC yield of 4.85% and an effective duration of 4.27 years.

Colombian 10-year bonds yield 6.32%, or about 70 basis points more than benchmark Greek debt with a lower credit rating.

WisdomTree Emerging Markets Local Debt Fund