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Why Emerging Market Corporate Bond ETFs are Hot

tlydon@globaltrend.com (Tom Lydon)

One asset class that will be a battleground for ETF providers in coming years is the market for emerging market corporate debt.

For example, this week Van Eck launched a new fund focuses on U.S. dollar-denominated high-yield bonds in emerging market countries.

Market Vectors Emerging Markets High Yield Bond ETF (HYEM - News) tracks an index comprised of U.S. dollar-denominated debt issued by non-sovereign emerging market issuers rated BB1 or lower. [Van Eck Lists High-Yield Emerging Market ETF]

Other ETFs introduced this year that invests in emerging market corporate bonds include iShares Emerging Markets High Yield Bond Fund (EMHY - News) and the WisdomTree Emerging Markets Corporate Bond Fund (EMCB - News).

Josh Brown at the Reformed Broker blog notes the asset management industry has been interested in emerging market bonds, but mostly in the form of sovereign debt – bonds from the countries themselves.

“And now that the acceptance is mainstream, there is a brand new asset class nudging its way into professionally managed portfolios that I’m just now starting to consider myself. We’re talking Emerging Markets Corporate Debt — bonds from highly-rated issuing companies in the EM regions as opposed to the countries themselves,” he wrote in a recent blog post.

“The logic makes sense — if we own both corporate bonds and Treasury bonds in our fixed-income allocations here, so why would we not do the same abroad?” Brown said.

He pointed out WisdomTree Emerging Markets Corporate Bond (EMCB), which is actively managed. It was launched in March. Bond manager and Legg Mason (LM - News) subsidiary Western Asset Management is a sub-advisor to the fund. [Investors Get First ETF for Emerging Market Corporate Bonds]

Also, iShares Emerging Markets Corporate Bond Fund (CEMB - News) hit the market last month. It provides access to high-yield bonds denominated in U.S. dollars. [iShares Lists New High-Yield ETFs]

Fund managers are looking outside U.S. debt now for yields on junk bonds outside the country at almost double the average of the past decade, according to a recent Bloomberg report. [High-Yield ETFs Go Global]

ETF providers have taken notice and are now offering a wider range of high-yield bond funds for emerging markets. [High-Yield Bond Investors Have More ETF Choices]

The largest emerging market bond ETFs invest in sovereign debt. These funds include iShares J.P. Morgan USD Emerging Markets Bond Fund (EMB - News), PowerShares Emerging Markets Sovereign Debt Portfolio (PCY - News), WisdomTree Emerging Markets Local Debt Fund (ELD - News), Market Vectors Emerging Markets Local Currency Bond (EMLC - News), SPDR Barclays Capital Emerging Market Local Bond (EBND - News) and iShares Emerging Markets Local Currency Bond Fund (LEMB - News). [Investors Get More ETF Options for Emerging Market Bonds]

Brown in an email Thursday said his firm Fusion Analytics currently has no direct exposure to emerging market debt, corporate or sovereign. However, the argument for these asset classes are higher yields, better demographics and better underlying economic fundamentals.

“I think the space is too new as an asset class and there are some big geopolitical risks in the many of the countries involved. Also, the market is not very deep or wide yet although improving, so I think the right approach is an active manager who can really follow this stuff closely,” Brown said.

Fusion Analytics lets ETFs “season” for at least a quarter before the funds can get into its repertoire as a rule, he added.

WisdomTree Emerging Markets Corporate Bond Fund

Full disclosure: Tom Lydon’s clients own EMB.