Amid low yield all over the world, income-starved investors are presently in search of solid current income. After all, Euro zone and Japan are now following a negative interest rates policy while rates at other developed economies are at rock-bottom levels.
In the U.S., which tried to go against the flow by raising key rates after a decade last December, the confidence level weakened this year after a global market rout. Investors flocked to safe haven assets like government bonds and dumped risky assets like equities.
As a result, yields on the benchmark 10-year U.S. Treasury fell 50 bps to 1.74% on February 23, 2016 from the start of the year. Yields on Japan's benchmark 10-year government bond slid to below zero for the first time in early February and yields on 10-year German bunds also slid to multi-month levels (read: International Treasury ETFs: Winners Amid Gloom).
In such a situation, investors’ craving for a steady current income is warranted. One space that offers solace is emerging market (EM) local currency bonds, which provide a solid yield. Fading hope of frequent Fed hikes this year should also bring some relief to emerging market securities (read: Emerging Market Currency Bond ETFs: Safe Haven/Risky Bet?).
Local currency products are likely to gain this year because the US dollar has been subdued, having lost about 1.5% in the year-to-date frame (as of February 22, 2016). So investors can enjoy some gains from the emerging market currency appreciation (read: Top and Flop Currency ETFs YTD).
Also, emerging market currency bonds and the related ETFs provide investors greater protection to capital gains than EM equities. Plus, what can be a better bet if those bond ETFs have low beta that works as a solid bulwark against market volatility.
Keeping this in mind, we highlight five local-currency denominated EM bond ETFs that have a negative beta and offer smart yields. Even if these bond ETFs fail to please investors by capital gains, hefty yields will be there to make up for the underperformance. Investors could make a fixed income play with local currency denominated bond ETFs in the near term (see all emerging market bond ETFs here).
Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) – Beta negative 0.50
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 203 securities in its basket with an average modified duration of 4.83 years and average years to maturity of 7.03. In terms of country exposure, Malaysia (8.63%), Poland (8.45%), Supranational (8.19%) and Mexico (8.06%) occupy the top four spots. About 74% 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 760,000 shares. It charges 47 bps in annual fees and has gained 1.7% so far this year (as of February 22, 2016). Additionally, the product has an excellent dividend yield of 6.18% per annum.
PowerShares Emerging Markets Sovereign Debt ETF (PCY) – Beta Negative 0.28
This 81-securitiy ETF includes bonds issued by Mexico, Panama, Peru, Uruguay, Venezuela, Bulgaria, Russia, South Africa, Turkey, Brazil, Colombia, Indonesia, Korea, Philippines, Qatar, Argentina, El Salvador and Vietnam.
The fund has an asset base of $2.57 billion and charges 50 bps in fees. The fund’s effective duration is 7.83 years while its years to maturity are 13.14. Around half of the bonds are rated BBB or higher. The product yields 5.58% annually (as of February 22, 2016) and has added 0.11% so far this year (as of February 22, 2016).
SPDR Barclays Capital Emerging Market Local Bond ETF (EBND) – Negative Beta 0.52
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 the emerging market countries. In total, the fund holds 236 securities with an average maturity of 7.59 years and adjusted duration of 5.33 years. In terms of credit quality, it focuses on bonds having Baa or higher ratings with almost 60% weight.
South Korea (12.2%) and Mexico (10.3%) take the top two spots. EBND has AUM of $52.4 million and average daily volume of 30,000 shares. Expense ratio comes in at 0.50%. The fund is up over 2% in the year-to-date frame (as of February 22, 2016) and has a 5.03% 30-Day SEC yield.
WisdomTree Emerging Markets Local Debt Fund (ELD) – Beta 0.54
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 117 securities with average years to maturity of 7.75 and an effective duration of 4.92 years. Poland, Brazil and Mexico are the top three countries. About 82% of the bonds are rated BBB or higher.
The fund has amassed $368.5 million in its asset base and charges 55 bps in fees per year. It trades in a good volume of more than 150,000 shares a day on average and has a good yield of 5.49% in annual dividend. The ETF has lost about 0.2% so far this year (as of February 22, 2016).
Market Vectors EM Aggregate Bond ETF (EMAG) – Beta Negative 0.60
The comprises sovereign bonds corporate bonds denominated in U.S. dollars, euros or local emerging markets’ currencies and includes both investment grade and below investment grade rated securities. While the U.S. dollar takes about 57.7% of the fund, other curries account for the rest. Effective duration is 4.80 years and years to maturity are 6.68.
The fund has amassed about $14.2 million in assets and charges 49 bps in fees. Government bonds make up 55.2% of the fund’s portfolio while energy (12.2%) and financials (11.6%) round out the top three positions. Around 64% of the portfolio is investment grade in nature. EMAG yields 4.83% annually and is up 2% in the year-to-date frame (as of February 22, 2016).
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