The bulls continue to reign supreme on Wall Street as earnings and data releases are helping to keep confidence levels afloat. Weekly jobless claims added fuel to the rally after coming in better-than-expected, but many investors couldn’t resist taking some profits off the table considering the stellar run-up; year-to-date, the S&P 500 Index has gained around 14% while the latest weekly employment report showed 323,000 people had filed for unemployment benefits versus the expected 335,000. Amid the euphoria, PowerShares expanded its product lineup with an intriguing emerging markets bond ETF aimed at investors looking to diversify away from the U.S. dollar [see also The Cheapest ETF For Every Investment Objective].
Fundamental Emerging Markets Local Debt Portfolio (PFEM)
The new PowerShares ETF is linked to the Citi RAFI Bonds Sovereign Emerging Markets Extended Local Currency Index, which is a benchmark designed to measure the potential return of a portfolio of bonds issued by the national governments of 18 emerging market countries. Furthermore, the underlying debt securities are denominated in the local currency where they are issued, thereby offering investors an opportunity to diversify their portfolio’s fixed-income component away from the U.S. dollar [see also King Dollar ETFdb Portfolio].
PFEM separates itself from other Emerging Markets Bonds ETFs by employing a fundamental strategy in lieu of a more traditional market cap weighted approach. This PowerShares ETF utilizes the RAFI methodology, which selects the underlying holdings based on four fundamental screens: GDP, population, land area and energy use. The bonds included in PFEM are weighted and re-balanced annually based on each country’s overall ranking across the various fundamental indicators.
Meet the EM Bond Fund Competitors
PFEM features an expense ratio of 0.50%, placing it right in the middle of the cost spectrum for the Emerging Markets Bonds ETFdb Category. This new ETF will face some stiff competition from more established competitors in the space, although PowerShares’ “brand muscle” should certainly bode well for the new entrant.
Below we highlight the four biggest competitors in the EM bond space, with each one boasting over $1 billion in total assets under management:
- iShares JPMorgan USD Emerging Markets Bond Fund (EMB, A-): This is by far the most popular emerging markets bond ETF, although its expense ratio of 0.60% could deter some more cost-conscious investors.
- PowerShares Emerging Markest Sovereign Debt Portfolio (PCY, A-): This ETF offers a similar objective to PFEM, but its portfolio of holdings is U.S. dollar-denominated.
- WisdomTree Emerging Markets Local Debt Fund (ELD, B): This fund invests in local debt securities denominated in the currencies of emerging market countries, making it very close competitor for PFEM.
- Market Vectors Emerging Markets Local Currency Bond ETF (EMLC, A): This ETF charges a competitive 0.47% expense fee, making it the cheapest EM bond fund with over $1 billion in AUM.
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Disclosure: No positions at time of writing.