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ETFs With Significant Exposure to Russian Bonds


Russia is the gift that just keeps on giving for traders and journalists with Thursday’s big news pertaining to the “R” in BRIC being Standard & Poor’s paring its outlook on Russian sovereign debt to negative from stable.

S&P reaffirmed Russia’s BBB foreign currency rating while saying “”In our view, heightened geopolitical risk and the prospect of U.S. and EU economic sanctions following Russia’s incorporation of Crimea could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia’s already deteriorating economic performance,” according to a statement.

News of S&P’s revised outlook on Russian bonds broke after it was revealed oligarch investors and Russian companies have recently been snatching up shares amid some of the lowest valuations in the emerging world. [Seeing Value in Russian Stocks]

Russia often vies with Brazil for the top spot among BRIC nations in terms of heft in emerging markets bond ETFs, meaning S&P’s lower outlook on the former’s debt could affect an array of dollar-denominated and local currency ETFs.

On the local currency front, the actively managed WisdomTree Emerging Markets Local Debt Fund (ELD) and the passively managed Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) each have allocations of at least 8% to ruble-denominated bonds. Malaysia is ELD’s largest country at almost 11% while Poland tops EMLC at over 10%. [Some Help for EM Bond ETFs]

The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) , the largest emerging markets bond ETF by assets, features dollar-denominated Russian debt to the tune of 5.84%, good enough to be the ETF’s third-largest country weight, according to iShares data.

EMB has a 30-day SEC yield of almost 5% with an effective duration of seven years. Over a third of the ETF’s 235 holding are rated BBB or BBB+ by S&P.

The ProShares Short Term USD Emerging Market Bond ETF (EMSH) , which has held up well considering its large combined weight to Russia and Ukraine bonds, allocates almost 10% of its weight to Russia. The combination of 30-day SEC yield of 4.6% and a modified duration of just 2.2 years could make EMSH, which debuted in November 2013, an alluring play if emerging markets bonds come back into style.

The Vanguard Emerging Markets Government Bond ETF (VWOB) , one of the most successful ETFs to debut last year, takes the cake among ETFs with sizable allocation to Russia sovereign debt. VWOB devotes 13.1% of its weight to Russian bonds, 320 basis points more than the ETF allocates to Brazil, its second-largest country weight.

VWOB holds nearly 610 bonds with an average duration of 6.5 years.

Vanguard Emerging Markets Government Bond ETF

Tom Lydon’s clients own shares of EMB.