Over the past few years, investors’ comfort level with obtaining bond exposure via ETFs has increased rapidly as a multitude of new products have hit the market, slicing and dicing the fixed income space in new ways and enhancing the level of granularity available. While the proliferation of bond ETFs has touched virtually every sector of the domestic bond market, these securities have failed to achieve the same reach in foreign bonds, where the current crop of choices is somewhat limited. Currently, there are only eight ETFs between the International Government Bond ETFdb Category and the Emerging Market ETFdb Category, while there are more than 25 ETFs focusing on just the U.S. Treasury space.
Perhaps sensing an opportunity in the international bond arena, issuers are beginning to focus efforts on this asset class. A recent filing from State Street detailed plans for the SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND), which would be the ETF giant’s first ETF foray into emerging market debt, an increasingly competitive space which has already attracted more than $3.5 billion in assets. Although details on EBND are still scarce, we have highlighted a few key aspects from the filing below:
The proposed fund would seek to replicate the Barclays Capital EM Local Currency Government Diversified Index by using a sampling strategy. That benchmark is designed to measure the performance of the fixed-rate local currency sovereign debt of emerging market countries, and includes government bonds issued by investment-grade countries outside the United States, in local currencies, that have a remaining maturity of one year or more. Eligible countries include Brazil, Chile, Colombia, Czech Republic, Egypt, Hungary, Indonesia, Israel, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, South Korea, Thailand and Turkey [also read International Bond ETFs To Diversify Fixed Income Exposure].
Emerging Market Bond ETFs
If approved, the new fund would mark the fifth ETF to offer exposure to emerging market bonds in what is quickly becoming a very competitive space. Despite the relative novelty of the category, investors have been quick to scoop up shares offering exposure to this asset class. All four of the current ETFs come from different issuers, with assets ranging from $2.4 billion in the iShares JPMorgan USD Emerging Market Bond Fund (EMB) to a low of $129 million in the Market Vectors EM Local Currency Bond Fund (EMLC).
The first ETFs to offer exposure to emerging market debt–EMB along with the PowerShares Emerging Markets Sovereign Debt Fund (PCY), which has nearly $1 billion in assets, focused on dollar-denominated debt issued by emerging market governments. More recently, WisdomTree and Van Eck have introduced funds that focus in debt denominated not in dollars but in the local currency of the issuer. Both ELD and EMLC have come flying out of the gates, generating significant interest among investors looking to shed their “home country bias” and beef up the allocation to emerging markets in their portfolio [also read Emerging Market ETFs: Seven Factors Every Investor Should Consider].
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Disclosure: Eric is long PCY.