Van Eck Debuts Local Currency Emerging Market Bond ETF (EMLC)

by on July 23, 2010 | ETFs Mentioned:

Earlier today, Van Eck launched the newest addition to their ever-growing list of international ETFs with the Market Vectors Emerging Markets Local Currency Bond ETF (EMLC). The new fund tracks the J.P. Morgan Government Bond Index Emerging Markets Global Core Index which is designed to track a basket of bonds issued in local currencies by emerging market governments. “With EMLC, we’ve created an ETF that allows investors to participate in the dynamics of the local emerging market economies, which include potential for currency appreciation and higher yields, relative to their developed market counterparts,” said Jan van Eck, Principal at Van Eck Global. “We’re very excited to be able to provide a means for tracking an index from the popular J.P. Morgan local currency bond index family, particularly at a time when the global markets are witnessing the growing importance of new economic leaders in regions such as Asia and Latin America.”

The index that EMLC tracks is market cap weighted but individual country exposure is capped at 10% and each of the countries which are included in the fund are required to make up at least 3% of the fund’s total assets. It rebalances monthly and has a net expense ratio of 0.49%. As of the end of May, the index consisted of approximately 173 bonds issued by the  following 13 emerging market governments; Brazil, Colombia, Egypt, Hungary, Indonesia, Malaysia, Mexico, Peru, Poland, Russia, South Africa, Thailand and Turkey. Countries are eligible for inclusion in the Index as long as they are classified as having a low or middle per capita income by the World Bank for at least two consecutive years. A country will be excluded from the index if it is classified as having a high income per capita by the World Bank for five consecutive years, based on data lagged one year [see the Definitive Guide To Emerging Market Bond ETF Investing].

Emerging Market Bonds In Focus

The ETF is the first of its kind to invest in local currency debt of emerging markets, and it offers a handsome average yield to maturity of 6.8%. The local currency aspect of the fund is especially intriguing due to the fact that it allows countries to better manage their debt loads without worrying about foreign currency exposure and it has traditionally allowed investors to receive a higher yield than similar debt that is issued in U.S. dollars by foreign governments. EMLC focuses on issues with a few years until maturity; the average years to maturity is 6.6 and only 21.6% of the fund is allocated to bonds that mature more than 10 years from now. This suggests that this fund will be less prone to interest rate fluctuations thus making the holdings more stable than similar longer-term securities. In terms of individual country exposure, Brazil, Malaysia, Mexico, Poland, South Africa, and Thailand all hit the 10% cap thus making up 60% of the fund’s total assets. All of the countries in the fund are rated investment grade by S&P with four countries achieving ‘A’ status or better and only two countries, Hungary and Egypt, hitting the bottom of the investment grade spectrum at BBB- [see Why Emerging Market Bond ETFs Are Safer Than Developed Markets].

Given their high yields, emerging market bonds have become an increasingly attractive place to put cash, especially considering the record low yields in much of the developed world and increasing concerns over sovereign debt issues in Europe [see Five Bond ETFs For Yield-Hungry Investors]. “Over the last few years emerging markets have demonstrated resilience as much of the developed world has experienced massive fiscal deterioration and skyrocketing debt levels,” said Joyce Chang, Head of Global Emerging Markets and Credit Research with J.P. Morgan. “Emerging market countries have driven global growth in recent years and have become one of the fastest growing asset classes, providing an important source of diversification for investors.”

There are also two other ETFs that track Emerging Market Bonds for investors who would prefer to invest in U.S. dollars instead of a variety of foreign currency bonds; the iShares JP Morgan Emerging Bond Fund (EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) which pay 30 Day SEC yields of 4.8% and 5.6% respectively. Both of the funds are up roughly 12% over the past 52 weeks and have gained roughly 5% so far in 2010 with EMB generally outperforming PCY. For more information on these funds, see their pages in the Emerging Market Bonds ETFdb Category or see this report that puts the two funds against each other head-to-head.

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Disclosure: Eric is long PCY