WisdomTree, the firm behind an already robust suite of international fixed income ETFs, announced on Thursday the launch of another first-to-market fund that expands the universe of bonds available to U.S. investors. The new Emerging Markets Corporate Bond Fund (EMCB) will be an actively-managed ETF that offers exposure to dollar-denominated corporate bonds from issuers in the developing world. The new ETF will be actively managed, with Western Asset Management serving as the sub-advisor and the JPMorgan Corporate Emerging Markets Bond Index Broad serving as the benchmark. EMCB will utilize a top down macro analysis combined with fundamental credit research.
Unique Opportunity In Emerging Markets
EMCB is the first U.S.-listed ETF to exclusively target debt of emerging market corporations; the existing ETF lineup included products such as the PowerShares International Corporate Bond Portfolio (PICB) and the SPDR Barclays Capital International Corporate Bond ETF (IBND), both of which hold exclusively debt of developed markets outside the U.S. That puts EMCB in a unique position to help investors round out their exposure to emerging markets, potentially complementing equity positions and investments in sovereign debt of emerging markets issuers.
The yields offered by emerging markets corporate debt generally represents a meaningful upgrade from both emerging markets sovereign debt and corporate bonds from U.S. issuers. With interest rates at record lows throughout much of the developed world, EMCB represents a potentially useful tool for enhancing current returns. Moreover, corporate debt represents a new way to tap into the compelling long-term growth potential for emerging markets; as the middle class of the developing world continues to grow at a rapid pace, the credit quality of issuers will improve along with demand for the debt.
“WisdomTree is pleased to offer the first Corporate Bond ETF that offers access to a rapidly growing asset class, the debt of a broad array of quality corporate issuers in the emerging markets. These bonds are supported by the same favorable growth rates, attractive demographics, and improving fundamentals which have driven strong relative returns in emerging market assets in general,” said Bruce Lavine, President & COO, WisdomTree.
Under The Hood
The benchmark for EMCB includes more than 300 individual debt securities from 35 different countries; the new ETF will generally hold between 35 and 70 bonds from about 15 different countries. At launch, the largest individual holdings of the portfolio included debt of Petroleos Mexica (7%), Petrobras (6.8%), Hutch Whampoa (5.5%), and Vale Overseas 4.2%). Though EMCB spreads exposure around the globe, there is a meaningful tilt towards Latin America in the portfolio.
About 23% of the portfolio is rated A or higher, with the bulk of EMCB rated between BB or BBB.
Dollar Denominated & Actively Managed
Many of WisdomTree’s existing fixed income products, such as the Emerging Markets Local Debt Fund (ELD) and Asia Local Debt Fund (ALD), focus on individual bonds that are denominated in the local currency of the issuers. EMCB, however, will target dollar-denominated debt, thereby removing the impact of exchange rate fluctuations on returns. That feature results largely from the current state of the debt markets in emerging economies; many corporations continue to issue bonds primarily in U.S. dollars, and in many cases there is not yet a liquid market for securities denominated in the local currency. The development of local currency denominated sovereign debt in many emerging markets is still a relatively recent phenomenon, so it could be several more years before it’s realistic to access local currency corporate bonds through an ETF [see Emerging & Frontier Markets ETFdb Portfolio].
EMCB’s status as an actively-managed ETF might be appealing to investors hesitant to utilize an index-based approach in certain emerging market asset classes. Besides the difficulty in replicating a benchmark of emerging market corporate bonds–the benchmark includes more than 300 issuers in almost three dozen different countries–there are the potential drawbacks of cap weighting in many bond indexes. Moreover, there should be some appeal in the ability to tap into the expertise of an experienced manager familiar with the local trading environments and nuances of credit analysis.
EMCB represents the first partnership in the ETF space between WisdomTree and Western Asset Management, a subsidiary of Legg Mason. EMCB will charge an expense ratio of 0.60%, which falls in the range of existing products in the Emerging Markets Bonds ETFdb Category.
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Disclosure: Long ELD.