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Guide to Local Currency Emerging Market Bond ETFs - ETF News And Commentary

Sweta Killa

Amid low interest rates and lower returns from U.S. fixed income instruments such as Treasury bonds and corporate bonds, investors are in search of yields. One place where they can quench their thirst is the attractive emerging market local currency bonds space, which provides capital appreciation, a solid yield, and gains from emerging market currency appreciation.

These have gained immense popularity in recent months due to a strong dollar, cheap oil, and improving emerging market fundamentals. This is especially true as a number of countries across the world chose loose monetary policies, in particular interest rates cuts, to stimulate growth and prevent deflationary pressures in stark contrast to the U.S. tightening policy. As fixed income instruments appreciate when the interest rates go down, the emerging markets’ sovereign debt offers a strong capital appreciation opportunity (read: 3 ETFs to Fight Against Global Currency War).

While a lower oil price has taken a toll on the Russian economy, it is benefitting other emerging nations as the majority of them import more oil than export. Further, slumping currencies are making exports competitive, leading to higher profits, and improving the countries’ trade balance. Moreover, exposure to these markets adds significant diversification benefits to a fixed income portfolio due to their low correlation with the developed markets.

However, local currency denominated bonds are exposed to a number of currency risks as the U.S. dollar is strengthening and is expected to continue doing so given that the Fed is on track to raise interest rates later in the year. But over the long term, the currencies of developing economies are likely to outperform the U.S. dollar given adequate levels of foreign exchange reserves, better fiscal health and relatively lower debt levels. And, when the emerging market currencies appreciate, bonds denominated in local currencies would lead to additional gains. Since many of these nations are below-investment grade, yields also look to be elevated when compared to similar bonds for developed market nations.

Thanks to these encouraging trends, investors could make a fixed income play with local currency denominated bond ETFs. We have highlighted some of the popular ETFs in the space for true diversification in one’s portfolio and higher longer-term return. All these funds are attractively valued at current levels as these are trading near their one-year low (see: all the Emerging Market Bond ETFs here).

Market Vectors Emerging Markets Local Currency Bond ETF (EMLC)

This fund provides direct exposure to local currency bonds issued by emerging market governments by tracking the J.P. Morgan GBI-EMG Core Index. It holds 239 securities in its basket with an average modified duration of 5.12 years and average years to maturity of 7.46 years. In terms of country exposure, Malaysia, Poland, and South Africa occupy the top three spots with over 8% allocation each. About 62% of the portfolio is focused on investment grade bonds with BBB or higher ratings.

EMLC is the largest and popular ETF in the local currency emerging bond space with AUM of over $1 billion and average daily volume of 594,000 shares. It charges 52 bps in annual fees and has lost 6.4% over the trailing one-year period. Additionally, the product has an excellent dividend yield of 6% per annum and 30-day SEC yield of 5.53% (read: 3 ETFs Yielding Over 6% to Watch as Market Speculates Rising Rates).

WisdomTree Emerging Markets Local Debt Fund (ELD)

This actively managed ETF does not track a specific benchmark, but seeks a high level of total return consisting of both income and capital appreciation. It currently holds 106 securities with average years to maturity of 7.81 and an effective duration of 5.18 years. Malaysia, Poland, Mexico and Brazil are the top four countries accounting for double-digit allocation. About 72% of the bonds are rated BBB or higher.  

The fund has amassed $565.1 million in its asset base while charges 55 bps in fees per year. It trades in good volume of more than 171,000 shares a day on average and has a good yield of 4.60% in annual dividend and 4.92% in 30-day SEC yield. The ETF has lost 1.3% over the one-year period.

iShares Emerging Markets Local Currency Bond ETF (LEMB)

This fund follows the Barclays Emerging Markets Broad Local Currency Bond Index, holding 198 securities in its basket with weighted average life of 6.59 years and effective duration of 4.58 years. It focuses on higher credit quality bonds as about 93% of the portfolio is rated BBB or higher. South Korea and Brazil dominate the country profile making up for 20.5% and 14.6%, share in the basket while Mexico makes up for 8.6% share (read: Best and Worst Emerging Markets ETFs in Focus).

With AUM of $595 million, the product sees moderate average daily volume of 79,000 shares and charges 50 bps in annual fees and expenses. In terms of yield, the ETF has 2.79% in annual dividend and 4.48% in 30-day SEC yield. The fund is down 2.6% over the trailing one-year period.

SPDR Barclays Capital Emerging Market Local Bond ETF (EBND)

This product tracks the Barclays Capital EM Local Currency Government Diversified Index, which is designed to measure the performance of fixed rate local currency sovereign debt of emerging market countries. In total, the fund holds 304 securities with average maturity of 7.37 and adjusted duration of 5.22 years. In terms of credit quality, it focuses on bonds having Baa or higher ratings.  

Brazil and South Korea take the top two spots with 12.6% each while Mexico, Thailand and Poland round out the top five. EBND has AUM of $109 million and average daily volume of 35,000 shares. Expense ratio came in at 0.50%. The fund has delivered negative returns of 2.7% over the trailing one-year period and has a 4.77% 30-Day SEC yield.    

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MKT VEC-EMG MKT (EMLC): ETF Research Reports
WISDMTR-EM LDF (ELD): ETF Research Reports
ISHARS-EM LCBF (LEMB): ETF Research Reports
SPDR-BC EM LB (EBND): ETF Research Reports
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