The past few weeks have been a relatively slow stretch for the ETF industry–at least in terms of product development. Since EGShares rolled out a suite of sector-specific emerging markets ETFs on June 23, only two new products have hit the market: the S&P 500 Crude Oil Linked ETN (BARL) from Morgan Stanley and the ISE Cloud Computing Index Fund (SKYY) from First Trust. But behind the scenes, the innovation that has become a defining characteristic of the ETF industry has continued at a breakneck pace.
A number of different issuers have been busy laying the groundwork for new ETF launches, and WisdomTree has been particularly active in stuffing some new ideas into the already full product pipeline. Below we profile some of the most recent filings from one of the fastest-growing ETF issuers:
Emerging Markets TIPS
One interesting idea detailed in a recent SEC filing is the WisdomTree Emerging Markets Inflation Protection Bond Fund, a product that would invest in inflation-linked debt of issuers in Asia, Latin America, Eastern Europe, Africa, and the Middle East. According to the filing, the portfolio would include debt from countries including Brazil, Chile, Colombia, Israel, Mexico, Peru, Poland, South Africa, South Korea, Thailand and Turkey.
The proposed fund, which would be actively managed, would join existing products in the WisdomTree lineup such as the Emerging Markets Local Debt Fund (ELD) and Asia Local Debt Fund (ALD). Those two ETFs have aggregate AUM of nearly $1.5 billion.
Most of the existing products in the Inflation Protected Bonds ETFdb Category focus on debt issued by the U.S. government, many of which feature paltry yields in the current environment. The most popular TIPS ETF, the Barclays TIPS Bond Fund (TIP), recently had an average real yield to maturity of only about 0.24%. An ETF focusing on inflation-linked securities of emerging markets issuers would likely have a considerably higher yield, while still offering potential protection from rising prices.
iShares recently debuted two international inflation-linked debt ETFs, including the International Inflation Linked Bond Fund (ITIP has no U.S. exposure) and the Global Inflation Linked Bond Fund (GTIP allocates about a third of its portfolio to U.S. TIPS).
China Local Debt ETF
Another recent WisdomTree filing detailed what would be another ETF first: the China Local Debt Fund. That ETF, which would also be actively managed, would invest in debt of Chinese issuers denominated in Chinese yuan. According to the SEC filing, the China bond ETF would invest “a large percentage” of assets in securities issued in Hong Kong that are governed by the Supplementary Memorandum of Co-operation between the People’s Bank of China (PBoC) and the Hong Kong Monetary Authority (HKMA).That agreement, which allows for trade of settlement of securities denominated in yuan in Hong Kong, has resulted in an active market for yuan-denominated debt outside of mainland China. The filing also noted that the portfolio would generally maintain an effective duration between two and eight years.
There are currently no pure play China bond ETFs available to U.S. investors. WisdomTree and Van Eck both offer China yuan ETFs, and Chinese debt is included in some of the products in the Emerging Markets Bonds ETFdb Category. China is one of the 12 constituent countries in ALD, which invests in local currency debt from both developed and emerging Asian economies outside of Japan.
In a February SEC filing, Guggenheim detailed plans to launch a China Yuan Bond ETF, though the initial filing included no information on ticker, expense ratio, or underlying index.
Emerging Markets Corporate Debt ETF
A third proposed ETF focusing on international debt is the WisdomTree Emerging Market Corporate Bond Fund, which would invest in debt securities of corporations that are domiciled in or economically tied to emerging markets. The filing indicated that component debt securities may be denominated in either local currencies or in U.S. dollars, and that the ETF would be actively managed.
The list of potential component companies was a bit longer than the aforementioned emerging markets TIPS ETF; the SEC filing included Brazil, Chile, China, Colombia, Hong Kong, India, Indonesia, Israel, Kazakhstan, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, Singapore, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand Turkey, and the UAE as potential destinations.
Most of the existing ETFs in the Corporate Bond ETFdb Category are focused exclusively on investment grade U.S. debt, though there are a couple international options. The PowerShares International Corporate Bond Portfolio (PICB) measures the performance of investment-grade corporate bonds issued by non-U.S. issuers in the Australian Dollar (AUD), British Pound (GBP), Canadian Dollar (CAD), Euro (EUR), Japanese Yen (JPY), Swiss Franc (CHF), Danish Krone (DKK), New Zealand Dollar (NZD), Norwegian Krone (NOK) and Swedish Krona (SEK).
Disclosure: No positions at time of writing.