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For Immediate Release
Chicago, IL – May 17, 2012 - Stocks and funds in this article include J.P. Morgan USD Emerging Markets Bond Fund(EMB - ETF report) and PowerShares Emerging Markets Sovereign Debt Portfolio(PCY - ETF report)
Neena Mishra explains the emerging market bond ETFs should be a part of any fixed income portfolio and analyses the top two choices available to the investors in this space.
Top Two Emerging Market USD Bond ETFs Head-to-Head written by Neena Mishra, CFA of Zacks Investment Research:
With the “safer” US fixed income instruments such as Treasury bonds and high-grade corporate bonds yielding meager returns, many income oriented investors now prefer to look towards emerging markets for additional income in their fixed income portfolios.
Further due to their low correlation with the developed markets, exposure to these markets adds significant diversification benefits to a fixed income portfolio.
Emerging markets currently represent about one-third of global GDP and their share will continue to grow in the coming years. As such they should be a part of any investment portfolio. Most investors should consider about 10% to 30% (depending on their risk tolerance) allocation to emerging markets in their fixed income portfolios.(See more on ETFs at theZacks ETF Center).
Emerging market bonds generally have a higher risk than developed market bonds, which is offset by higher yields that they offer. However, the risk profiles seem to be improving as many emerging market countries now have a better fiscal health thanthe developed countries. Additionally, for most countries inflation risk seems to be declining. (Read:Go Local With Emerging Market Bond ETFs)
EMB is based on the JP Morgan EMBI Global Core Index that tracks the total return of actively traded debt instruments in emerging market countries. The index includes both fixed and floating rate instruments issued by sovereign and quasi-sovereign entities (100% owned by the government or having 100% government guarantee). The instruments should be denominated in US Dollars and should have a current face amount outstanding of more than $ 1 billion.
EMB currently owns debt from 39 countries with weightings determined by market value. Top country allocations are to Brazil, Russia, Mexico, Turkey, Philippines, Indonesia, Colombia, Venezuela, Peru and Poland. The index is rebalanced monthly. About 30% of the holdings are rated “BBB” by S&P, while about 14% are rated “BBB-“.
PCY is based on the DB Emerging Market USD Liquid Balanced Index, which tracks the potential returns of a theoretical portfolio of liquid emerging markets U.S. dollar-denominated government bonds issued by22 emerging-market countries.
The Fund is rebalanced and reconstituted quarterly. In terms of country allocations, top exposures are to Pakistan, Peru, Qatar, Lithuania, Colombia, Turkey, Uruguay, Panama, South Korea and Vietnam. The fund has returned 8.36% since inception. 43.5% of the fund holdings are rated “BBB” by S&P while 30.3% are rated “BB”.
Though both the ETFs were launched around the same time, EMB has proved to be much more popular than PCY and has attracted $4.73 billion in assets so far, compared with $1.79 billion for PCY. With exposure to more countries and by holding more securities, it is much more diversified than PCY.
At the same timeEMB is more expensive, charging 60 bps annually versus 50 bps for PCY. With a higher duration, PCY is more exposed to interest rate risk and as a compensation for additional risk, it is currently offering 84 bps additional yield over EMB
For the rest of this ETF article, please visit Zacks.com at: http://www.zacks.com/stock/news/75236/top-two-emerging-market-usd-bond-etfs-head-to-head
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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