One Year Later: EMLC Comes Through For Yield Hungry Investors

by on July 25, 2011 | ETFs Mentioned:

The ETF industry continues to expand at an impressive rate, with dozens of new products debuting every month and the size of the lineup quickly approaching the 1,300 mark. While each new month generally brings a number of new product launches, it also beings some important milestones for ETFs that have debuted in the past. While some investors have no problem jumping into newly-launched products, others may hesitate to put assets in products that don’t yet have a track record. For those investors facing explicit or self-imposed “age restrictions,” the first year of operations can give investors a good idea of the risk/return profile that can be expected.

During the month of July, 25 various exchange traded funds will celebrate their first birthday. Many of the ETFs that debuted in July of 2010 were innovative, first-to-market products; the month’s launches included the first small cap India ETF (SCIN), a suite of ex-U.S. sector funds from iShares, and a fund focused exclusively on the lithium industry (LIT). Also making its first appearance in the space was Market Vectors Emerging Markets Local Currency Bond ETF (EMLC). This product was the first of its kind, offering exposure to emerging market debt denominated in local currencies [see also International Bond ETFs: Cruising Through All The Options].

Existing products in the Emerging Markets Bond ETFdb Category had offered exposure to debt denominated in U.S. dollars, but the currency exposure offered by EMLC gives this fund a completely unique risk/return profile. Being denominated in local currencies gives this fund exposure to the relevant exchange rates, offering dollar diversification within the fixed income segment of a bond portfolio. Moreover, debt denominated in local currencies may feature yields or risk characteristics that vary slightly from similar bonds denominated in the greenback. EMLC has been quite popular with investors, accumulating more than $400 million in assets in its first year of operations. Part of that impressive asset growth is no doubt related to the fund’s solid performance; taking a look at the return exhibited by EMLC in its first year sheds some light on the potential uses of this asset class.

Catching Up With EMLC

In its first 52 weeks of operations, EMLC returned about 13.6% to investors, and made some relatively attractive distributions as well. This ETF makes distributions on a monthly basis, and investors in EMLC realized annualized distribution yields that exceed 5%. [see also Bond ETFs In Focus: Defining All The Yield Metrics].

Distribution Payment Date
$0.108 9/01/2010
$0.08 10/1/2010
$0.10 11/1/2010
$0.105 12/1/2010
$0.094 12/29/2010
$0.108 2/1/2011
$0.113 3/1/2011
$0.134 4/1/2011
$0.122 5/2/2011
$0.134 6/1/2011
$0.12 7/1/2011

It’s interesting to compare EMLC’s performance over the last year to products such as the JP Morgan Emerging Bond Fund (EMB), one of the dollar-denominated emerging markets bond ETFs. The Van Eck fund outpaced EMB by about 500 basis points during the last year, highlighting the potentially significant impact that currency exposure can have on fixed income securities (the same can be said for equities).

Of course, the exposure to the local currencies of the debt issuers won’t always work in favor of investors; in certain environments, dollar-denominated debt will outperform securities issued in real, pesos, and yuan. But the gap between these products indicates that the decision to take on currency exposure is a significant one that can have a material impact on the bottom line returns.

It’s also interesting to note that EMLC has performed quite well compared to emerging market stocks. The most popular emerging market fund, Emerging Markets ETF (VWO), added about 19.8% during the same period.

Beating Up On AGG

Investors not quite sold on the potential benefits of diversifying fixed income exposure beyond U.S. borders may be interested in a side-by-side comparison of EMLC with the ultra-popular Barclays Aggregate Bond Fund (AGG), a fund that offers exposure to the broad U.S. investment grade debt market. EMLC left AGG in its dust, rewarding investors who had looked overseas for fixed income exposure handsomely. The emerging market debt product also outperformed the SPDR Barclays International Treasury Bond Fund (BWX), which tracks debts of developed nations aside from the U.S. [see also China Bond ETF Race Heats Up].

The one year time frame, of course, represents a relatively limited sample size. In some environments, debt from emerging markets issuers may experience greater downside volatility than Treasuries and U.S. corporates. But the wide gaps between EMLC and funds such as AGG gives a good illustration of the potential return enhancement benefits that emerging markets debt can add to fixed income portfolios.

Finally, because EMLC is denominated in emerging market currencies, it is important to look at how this product has fared versus the currencies themselves. The Dreyfus Emerging Currency Fund (CEW), which tracks currencies from nations like India, South Korea, Malaysia, and many others, has gained about 6.7% over the trailing year. The same exchange rate movements that benefited CEW also boosted EMLC over the last year, with the coupons generated by the underlying securities also adding to the bond fund’s returns.

Ticker 12-Month Return* 30-Day SEC Yield
EMLC 13.65% 6.2%
EMB 7.48% 4.56%
CEW 6.74% -0.51%
VWO 19.78% n/a
AGG 3.41% 2.41%
BWX 12.36% 2.45%
*As of 7/21/2011

Verdict

For investors looking to enhance the yield of their fixed income or add some currency diversification, EMLC could be worth a closer look. Also, this fund makes for a particularly interesting play in the current fixed income environment, as numerous developed nations around the world, including our own, are still paying anemic rates that are far lower than many nations in the emerging world [Pro Members can see the High Yield ETFdb Portfolio].

“As the developed world grapples with credit downgrades and negative fundamentals, the outlook for emerging market credit is positive on the back of individual EM countries that have worked to strengthen economic policies and improve their credit profiles” said Jan van Eck, Principal at Van Eck Global in reference to the fund’s one-year anniversary.

EMLC also sparked a number of competing products; funds such as ELD, ALD, and EBND have all launched in the last year, giving investors seeking exposure to emerging markets debt a number of options.

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Disclosure: No positions at time of writing.