Most fixed income assets have struggled in the new year. For example, the iShares Core US Aggregate Bond ETF (NYSE: AGG), the largest bond exchange traded fund in the U.S., is lower by 2.7 percent.
Corporate bonds, both investment-grade and junk, are not offering much shelter from the storm. Perhaps surprisingly to some investors, emerging markets debt has been a source of bond market strength this year. The WisdomTree Emerging Markets Local Debt Fund (NYSE: ELD), an actively managed fund, is higher by nearly 2.2 percent year-to-date.
ELD holds bonds denominated in local currencies. Its geographic selection universe includes Brazil, Chile, Colombia, Mexico, Peru, Poland, Romania, Russia, South Africa, Turkey, China, Indonesia, Malaysia, Philippines, South Korea and Thailand.
Through late February, the J.P. Morgan GBI-EM Global Diversified Composite Yield to Maturity Index, a widely followed gauge of developing world debt, was outpacing two- and 10-year Treasuries, 10-year German bunds and a major junk bond index, among other fixed income assets. Diverging rate patterns could explain this scenario as well as ELD's impressive year-to-date showing.
“This divergence in rate patterns has helped to play an integral role behind the different performance stories,” WisdomTree said in a recent note.
“As the reader can clearly see in the accompanying chart, emerging market local debt is the only asset class that has thus far come in on the plus side of the ledger, year-to-date, posting a return of 4.2 percent (J.P. Morgan Government Bond Index – Emerging Markets Global Diversified Index). This is in stark contrast to the negative performances seen throughout the developed sovereign debt markets.”
ELD holds over 130 bonds and has an effective duration of 4.65 years. Nearly 76 percent of the fund's holdings are rated BBB or A.
A Different Approach
Most bond ETFs, regardless of geographic emphasis, are cap-weighted. ELD takes a different approach — one that can help reduce risk and potentially boost income.
“By focusing on factors such as short-term external debt over international reserves, current account over gross domestic product and gross government debt over GDP, we are able to boost allocations to countries that are pursuing monetary and fiscal discipline, while reducing weightings to those that are overextended,” WisdomTree said.
ELD allocates about 31 percent of its combined weight to Russia, Brazil and Indonesia.
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