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Before 2012, one of the weakest parts of the iShares lineup was clearly bond funds. The company was seeing a variety of issuers gain share thanks to a variety of quality products in the fixed income space, eating into iShares’ dominance of the ETF world.
However, iShares has made great strides to correct this in recent months, as the company has debuted a series of targeted bond funds for the U.S. and a number of ETFs with a focus on international markets as well. In continuing with this trend, the company has debuted the latest Emerging Market Corporate Bond ETF, under the ticker (CEMB - ETF report).
This brand new fund will focus in on the corporate bond segment of the emerging market world, a generally underserved market segment for U.S. ETF investors. The product will charge investors 60 basis points a year and hold securities across a variety of nations including those in Latin America, Eastern Europe, the MENA region, and Asia (see Three Bond ETFs For A Fixed Income Bear Market).
In order to be included in the benchmark—the Morningstar Emerging Markets Corporate Bond Index—individual bonds must have at least half a billion in outstanding face value and the notes must mature in at least 13 months from now. Furthermore, investors should note that the index imposes a 5% cap, with a pro rated distribution of any excess weight to ensure that a few securities do not dominate the risk/return profile of the fund.
For sector exposure, the underlying index has a concentration in energy securities and banks, something that shouldn’t be too surprising for emerging market focused ETF investors. Beyond this, investors should also note that the index has a short-term focus; 85% of the benchmark matures in less than 10 years while the effective duration comes in at 5.5 years (see more on ETFs at the Zacks ETF Center).
In terms of countries, Latin American nations take the top two spots with Brazil (19%) and Mexico (11.8%). After these Latin nations, Russia (11.6%), South Korea (9.4%), and the UAE (6.8%) round out the top five, although over two dozen other countries receive an allocation as well (see The Guide To China Bond ETFs).
The yield in this product looks to come in somewhere around the 4.9%-6.3% based on the index, although we will have to wait and see what the actual results are after the first few payouts. Also, it is important to note that the securities in this product are denominated in U.S. dollars, so there isn’t a currency risk for those who might buy the fund although the companies who do issue the bonds are probably facing some currency risks of their own.
Emerging Market Corporate Bond ETF Competition
Although the emerging market bond world is becoming increasingly crowded, the vast majority of funds tend to reside in the sovereign space. In fact, of the nine other funds in this market segment eight have a focus—or are entirely in—government securities. As a result, the only real competition to iShares’ new bond ETF is the WisdomTree Emerging Markets Corporate Bond Fund (EMCB - ETF report).
This recently launched ETF is actively managed and charges investors 60 basis points a year in fees, the same expense ratio as CEMB. The fund has the same top sector as its iShares counterpart, although it has a slightly lower level of concentration in this segment. Also, bank bonds only make up 3.3% of the portfolio for WisdomTree’s case, suggesting it may be more focused on industrial bonds than its counterpart (read WisdomTree Launches Emerging Markets Corporate Bond ETF).
The bond ETF does look to have a slightly higher effective duration, coming in at 6.4 years. This looks to result in slightly higher credit and interest rate risk but will probably help boost the yield above that of iShares’ entrant in the space. In fact, the payout so far has been around the 4.7% mark in 30 Day SEC Yield terms.
Either way, it is pretty safe to assume that the emerging market corporate bond ETF space can handle more than one fund quite easily. There are over 40 corporate bond ETFs on the market right now, however, most have an American, or in some cases, a global focus. Together, they combine to hold assets of nearly $57.5 billion, suggesting there is a huge demand for fixed income that this new iShares bond ETF is just starting to tap into.
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