State Street Debuts Two New Emerging Markets ETFs

by on February 25, 2011 | ETFs Mentioned:

State Street rolled out two new ETFs on Thursday, launching products offering exposure to emerging markets equities and fixed income securities. The SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND) will seek to replicate a benchmark consisting of fixed-rate local currency sovereign debt of emerging market countries, while the SPDR S&P Emerging Markets Dividend ETF (EDIV) is linked to a benchmark made up of dividend-paying emerging markets stocks. “Against a backdrop of historically low Treasury yields, demand for precise exposure to innovative debt and dividend instruments is climbing,” said James Ross, senior managing director and global head of SPDR Exchange Traded Funds at State Street Global Advisors. “The launch of the SPDR S&P Emerging Markets Dividend ETF and SPDR Barclays Capital Emerging Markets Local Bond ETF helps to underscore the evolution of views on diversification – investors no longer see emerging markets as a single, uniform asset class.”

EBND becomes the fifth ETF in the Emerging Markets Bonds ETFdb Category, and the third to offer exposure to debt denominated in local currencies. By investing in local currency debt, EBND will offer exposure both to sovereign debt of emerging markets while also delivering a hedge against the U.S. dollar. iShares (EMB) and PowerShares (PCY) both offer emerging markets bond funds that invest in dollar-denominated debt, while WisdomTree (ELD) and Van Eck (EMLC) rolled out local currency bond funds last year [Heed Bill Gross' Warning With These Emerging market Bond ETFs].

With interest rates in the U.S. and many other developed countries near record lows amid lingering weakness in underlying economic fundamentals, many investors have turned to other options for supplying current yield to their portfolios. At the end of January, the index underlying EBND had a yield-to-worst of 6.74%. The fund invests in sovereign debt of about 18 different countries, giving the largest allocations to South Korea (12%) and Brazil (12%).

EDIV seeks to replicate the S&P Emerging Markets Dividend Opportunities Index, a dividend-weighted benchmark that includes approximately 100 emerging market stocks paying the highest dividend yields. The largest individual holdings is Brazilian credit card processor Redecard SA (3.5%), followed by Telefonica O2 Czech Republic (3.3%) and Czech utility giant Cez (3.2%).

Not surprisingly, EDIV’s largest sector allocations go to utilities (18%), telecom (16%), and financials (16%), three corners of the market that tend to offer the highest payouts. Industrials (5%) and health care (1%) receive the smallest weightings in the fund [see Three Global Dividend ETF Options].

EDIV will face some stiff competition in the emerging markets dividend space, as the new fund is similar to several existing ETFs. WisdomTree’s Emerging Markets Equity Income Fund (DEM) and Emerging Markets SmallCap Dividend Fund (DGS) have assets of approximately $1.2 billion and $900 million, respectively. State Street is the second largest U.S. ETF issuer by total assets, but maintains a relatively small presence in the emerging markets space. Its Emerging Markets Small Cap ETF (EWX) has about $650 million in assets, making it the 11th largest by AUM in the Emerging Markets ETFdb Category. The SPDR S&P Emerging Markets ETF (GMM) has just $233 million in assets [also read Examining International Dividend ETFs].

[For more on the new SPDR ETFs, see the EDIV fact sheet or EBND fact sheet. For updates on all new ETFs, sign up for our free ETF newsletter.]

Disclosure: No positions at time of writing.