Thanks to quantitative easing fears and ongoing concerns over developed market economies, government bond yields have been breaking through all-time lows. Ten year bonds are currently yielding just 2.4% in the U.S. and just 0.84% in Japan, prompting many investors to look beyond traditional sources for fixed income exposure. A number of investors have sought both bonds in developed Asia-Pacific economies as well as emerging market bonds from around the globe as a way to increase current income and avoid sluggish economies with questionable balance sheets.
However, the number of international ETF bond options leaves much to be desired. Currently, there are only four ETFs in both the International Government Bond ETFdb Category and the Emerging Market Bond ETFdb Category. There are only two corporate bond ETFs with an international focus and not a single aggregate bond ETF targeting international markets. Against this backdrop, Van Eck’s recent filing detailing two proposed bond ETFs could have tremendous potential. According to the recent filing, the two proposed funds will trade under the Market Vectors brand and will target two important sectors of the world market: the LatAm Aggregate Bond ETF and the Asia ex-Japan Aggregate Bond ETF [see 2010: Year Of The Bond ETF.]
While the details are currently scarce, some key information is available which should be of interest to investors. Not surprisingly, the two funds will track the total bond market, including both government and corporate bonds in the regions of Latin America and Asia. Both will maintain caps to ensure that no one country dominates the index and will also exclude countries that have explicit capital controls. Although both target the aggregate bond market, the two funds will not invest in floating rate, inflation-linked, amortizing, or callable bonds. Below, we profile some of the more specific details of these novel ETFs from Van Eck:
Asia ex-Japan Aggregate Bond ETF
Van Eck’s Asia bond fund will track the Asia ex-Japan Aggregate Bond Index, a benchmark comprised of debt securities from issuers located in Asian countries (excluding Japan) and denominated in either U.S. dollars or the local currency of the issuer. Component bonds will include securities from China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand that are fixed-rate, domestic currency government bonds or corporate bonds with greater than 13 months to maturity.
The filing indicates that countries eligible for inclusion in the index must have a low middle per capita income as classified by the World Bank for at least two consecutive years; Singapore, South Korea, and Hong Kong are all ranked as ‘high-income’ economies by the organization [see Guide To Emerging Market Bond ETF Investing].
LatAm Aggregate Bond ETF
This fund will track the the LatAm Aggregate Bond Index, a benchmark comprised of debt securities issued by Latin American issuers and denominated in either U.S. dollars or the local currency of the issuer. The index consists of both government bonds and corporate bonds, and includes only those countries that are accessible by most of the international investor base [also see Emerging Market Bond ETFs Head-To-Head].
The underlying index will include bonds from Latin American region that are fixed-rate, domestic currency government bonds or investment grade corporate bonds with greater than 13 months to maturity. Like its Asian counterpart, this fund will only invest in countries that are classified as having a low or middle per capita income by the World Bank for at least two consecutive years. None of the Latin American nations fall into the ‘high income‘ category of the World Bank classification system.
Aside from its muni bond ETFs, Van Eck’s fixed income lineup is relatively limited, consisting of only the Emerging Markets Local Currency Bond Fund (EMLC). The company is better known for its focus on hard assets, including the ultra-popular Gold Miners ETF (GDX), Agribusiness ETF (MOO) and Junior Gold Miner ETF (GDXJ), all of which have more than $1.5 billion in assets under management. Considering the total lack of competition and increased investor demand for non-Western bonds, these two products, should they pass the SEC’s regulatory hurdles, could eventually become a huge hit with investors [see the complete list of Van Eck ETFs here].
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Disclosure: No positions at time of writing.