Market Vectors Planning Japanese Bond ETF

by on April 5, 2011 | ETFs Mentioned:

Japan’s economy has been in the spotlight for the last several weeks, as investors have attempted to determine the long-term impact of the recent natural disaster and ongoing nuclear crisis. Although the horrific disaster rocked the Japanese economy and brought up a fresh crop of issues for the nation, some are beginning to look beyond on the immediate turmoil and focus on long-term possibilities in the market. For investors seeking equity exposure, there are a handful of ETF options; the Japan Equities ETFdb Category includes seven different funds, including small cap options and even a hedged currency fund.

Options for investors seeking long or short exposure to Japan’s bond market have been limited historically, especially within the ETF wrapper. But as the industry continues to evolve, it seems likely that issuers will seek to expand options available for accessing the international fixed income asset class. Van Eck, the issuer best known in the ETF space for hard assets and emerging markets funds, has laid the groundwork to launch what could be the first ETF to offer pure play exposure to Japanese bonds. In a recent SEC filing the company shared some initial details on a Japanese Bond Fund product that would be launched under the Market Vectors name:

The proposed fund would track the Market Vectors Japanese Bond Index, a benchmark that is comprised of yen-denominated bonds of issuers located in Japan. The fund will invest in both corporate and government debt in the country, although there will seemingly be a heavy focus on corporate issues as Japanese government debt is only allowed to make up 25% of the fund’s total assets [see ETFs in the Total Bond Market ETFdb Category].

Competition

Despite the vast size of the Japanese bond market, there are few options for U.S. investors seeking to gain exposure. Currently, only two ETNs exist that offer concentrated exposure to the market; the DB Japanese Government Bond Futures ETN (JGBL), which tracks the DB USD JGB Futures Index, and its monthly leveraged counterpart, the DB 3x Japanese Government Bond Futures ETN (JGBT). Both of these funds offer investors exposure to an index of intermediate-term Japanese government debt that generally has a maturity between seven and 11 years from now. However, since the funds focus exclusively on the JGB market and do not offer exposure to corporates, they may not provide direct competition to Van Eck’s proposed fund if it is ever launched [see Country-Specific Bond ETNs Debut].

Investors can also obtain smaller levels of exposure to the market via any number of international government bond funds. Japanese debt makes up at least 20% of several products in the International Government Bonds ETFdb Category, including BWX, IGOV, BWZ, ISHG. Again, these funds only target the Treasury markets of developed countries.

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Disclosure: No positions at time of writing.