In another ETF industry first, Van Eck announced today the launch of an ETF offering pure play exposure to Latin American debt markets. The Market Vectors LatAm Aggregate Bond ETF (BONO) will seek to replicate the performance of the BofA Merrill Lynch Broad Latin America Bond Index, a benchmark that consists of sovereign and corporate debt securities from Latin American issuers denominated in U.S. dollars, euro, and local currencies. The underlying index will be market cap weighted, with individual issuer exposure capped at 20% of holdings.
Under The Hood
BONO includes allocations to several Latin American countries, with Brazil accounting for about 37% of the underlying index. Other countries comprising the benchmark include Mexico (29%), Colombia (12%), Venezuela (7%), and Argentina (4%). Chile, Peru, Panama, Jamaica, and Uruguay are also included. The benchmark is broad in nature, including about 450 individual securities.
“Local debt markets in Latin America have been maturing quickly in recent years,” said Jan van Eck, Principal at Van Eck Global. “Governments have limited their reliance on borrowing abroad, infrastructure projects are proliferating throughout the region, and better transparency has led to improved sovereign credit ratings. These factors, coupled with the relatively high yields currently offered by Latin American bonds, have served to increase foreign investment demand for the region’s sovereign and corporate debt.”
BONO may have appeal to investors looking for alternatives to the depressed yield on U.S. debt. The average coupon for the related index on BONO is nearly 8%, and the average yield to worst comes in at about 7.2%. By comparison, the weighted average coupon for the Barclays Aggregate U.S. Bond Fund (AGG) is just 4.6%. The yield to maturity for that U.S.-only fund comes in at 2.5% [Heed PIMCO's Warning With These Emerging Market Bond ETFs].
BONO’s holdings will be split between investment grade debt and bonds with credit ratings of B or lower. About 19% of the index components are rated “A” with another 57% rated “BBB.” The junk component of the portfolio includes about 14% of assets rates “B” and less than 1% with a rating of “CCC.”
The average modified duration of the new LatAm ETF will be about 5.8 years. The underlying index is spread relatively evenly across the maturity curve, with about 17% of holdings maturing in three years or less and another 15% or so maturing in three to five years [Definitive Guide To Emerging Market Bond ETF Investing].
Emerging Market Bond ETFs Continue To Grow
Historically, many investors have limited their fixed income exposure to debt of U.S. issuers. But as interest rate discrepancies are magnified and diversification from the U.S. dollar becomes more appealing, appetite for debt from international governments and corporations have increased. The pair of international corporate bond ETFs have seen steady growth and are turning in impressive performances in 2011
BONO becomes the seventh ETF in the Emerging Markets Bonds ETFdb Category, and the first to offer exposure specifically to Latin American issuers. Van Eck also offers a broad-based emerging market bond ETF, the Market Vectors EM Local Currency Bond ETF (EMLC). That fund includes meaningful allocations to Brazil (10%), Mexico (10%), Colombia (3.7%), Chile (3%), and Peru (3%), along with Eastern European issuers (such as Poland, Turkey, and Russia) and Asian economies (such as Malaysia, Indonesia, and Thailand). EMLC focuses on local currency bonds issued by emerging market governments; the recently-launched BONO will include corporate debt, as well as debt denominated in U.S. dollars and euro as well [see Why Emerging Market Bond ETFs Are Safer Than Developed Market Funds].
Earlier this year, WisdomTree launched the first international bond fund to target a specific region; the Asia Local Debt Fund (ALD) includes exposure to debt of issuers in a dozen developed and emerging Asian countries, including Indonesia, Singapore, and Australia. That actively-managed ETF has been tremendously popular with investors, taking in more than $250 million in assets in less than two months of trading. WisdomTree has additional international debt ETFs in the works, including one fund that could compete closely with BONO. In a 2010 SEC filing, the company detailed the WisdomTree Latin America Bond Fund, which would include securities from issuers in Brazil, Chile, Colombia, Mexico, Panama, Peru, Uruguay, and Venezuela. Also included in that filing were details on an EMEA bond fund that would invest in debt of issuers in Czech Republic, Egypt, Hungary, Israel, Poland, Qatar, Romania, Russia, Slovakia, South Africa, Turkey, and United Arab Emirates.
Disclosure: No positions at time of writing. Photo courtesy of Agencia Brazil.