WisdomTree Launches Active Emerging Markets Debt ETF (ELD)

by on August 9, 2010 | ETFs Mentioned:

WisdomTree, the New York-based ETF issuer whose product lineup includes a suite of actively-managed currency products, is stepping into the fixed income space. The firm announced today the launch of its Emerging Markets Local Debt Fund (ELD), an actively-managed ETF that will invest in local debt denominated in the currencies of emerging markets countries. ELD will be sub-advised by Mellon Capital Management Corporation.

ELD will be the fourth ETF in the Emerging Markets Bonds ETFdb Category, joining funds from iShares (EMB), PowerShares (PCY), and Van Eck (EMLC). Although all of these ETFs invest in emerging markets debt, the currency denomination is an important differentiating factor. Both EMB and PCY invest in dollar-denominated debt securities, while EMLC and WisdomTree’s new fund will focus exclusively on debt issued in the local currencies. As such, these local currency debt funds give investors exposure to emerging markets currencies in addition to the fixed income exposure. That’s potentially attractive to investors for multiple reasons. First, the emerging market currency exposure offers potentially valuable diversification benefits in the context of a traditional stock-and-bond portfolio. Second, bonds issued in local currencies often carry lower risk than similar debt denominated in dollars; it’s generally easier for the issuer to pay off notes in the home currency than those that were issued in U.S. currency [see Van Eck Debuts Local Currency Emerging Market Bond ETF].

“We believe emerging market debt is an attractive asset class, based on the faster growth and typically higher yields available in these countries relative to the U.S. and developed world,” said Bruce Lavine, WisdomTree President & COO, in a press release. “ELD will offer full exposure to local currencies, a feature we consider important for many investors because of the potential lower correlations and currency appreciation against the U.S. dollar.”

ELD is the only actively-managed fund in the category; the recently launched EMLC tracks the performance of the J.P. Morgan Government Bond Index Emerging Markets Global Core Index.

ELD does indeed offer an attractive current return profile; the weighted average coupon for the fund is currently around 6.8% while the average yield to maturity is nearly 5.5%. Those numbers dwarf the yields offered by government bonds in the developed world, where interest rates are hovering near all time lows and central banks are unlikely to raise rates at any point in the foreseeable future [see Why Emerging Market Bond ETFs Are Safer Than Developed Markets].

Under The Hood

ELD will utilize a structured quantitative methodology to determine its holdings. Specifically, component countries are broken into three tiers based on size, liquidity, and other factors. Countries in the first tier, which include Brazil, Mexico, Indonesia, and Malaysia, will receive a base weighting of 11.1%. The second tier–South Africa, South Korea, Poland, Thailand, and Turkey–is weighted at 7.4% per country. The third tier includes Chile, Colombia, Peru, the Philippines, and Russia; each of those markets receives a base weighting of 3.7%. But because the ETF is actively-managed, the adviser will have the ability to scale back positions in countries that are identified as potential trouble spots [also read Three Country ETFs Ripe With Risk].

Another interesting element of ELD is its starting point. Most new ETFs to hit the market in recent years have launched with $5 million or less in total assets; ELD will begin trading with about $125 million in assets, reflecting the significant investor interest in the new product. The fund will charge an expense ratio of 0.55% [for updates on all new ETFs, sign up for our free ETF newsletter].

Disclosure: No positions at time of writing.