Where Does Your Emerging Markets Bond ETF Really Invest?

by on April 26, 2013 | ETFs Mentioned:

The proliferation of ETFs has allowed for investors to more easily shed their home country bias when it comes to fixed income exposure in their portfolios. Among the 200+ Bond ETFs available, many have been quick to embrace emerging market offerings in lieu of developed market debt given the more attractive yields and potential to generate uncorrelated returns offered by this asset class [see 101 High Yield ETFs Every Dividend Investor Must Know].

While there are more than a dozen Emerging Markets Bond ETFs to choose from, three contenders separate themselves from the rest of the pack by boasting a commanding lead in terms of assets: meet the iShares JPMorgan USD Emerging Markets Bond Fund (EMB, A-), the PowerShares Emerging Markets Sovereign Debt Portfolio (PCY, B), and the WisdomTree Emerging Markets Local Debt Fund (ELD, B-), holding $5.8 billion, $2.6 billion and $1.9 billion, respectively, in total assets under management [Download How To Pick The Right ETF Every Time].

Comparing Country Holdings: EMB, PCY and ELD

At first glance these ETFs appear to be seemingly identical, as each one tracks the performance of a basket of bonds from emerging market issuers; however, the country breakdown charts below reveal some noteworthy insights about each of their geographic diversification profiles [try our Free Head-To-Head ETF Comparison Tool]:

The Bottom Line

Overall, each of the ETFs highlighted above boasts a well-diversified portfolio as neither fund features an overwhelming allocation to a single country or region. PCY offers the deepest variety of holdings as it offers exposure to 22 emerging market countries, although EMB and PCY are by no means shallow in this respect. Aside from geographic diversification  investors should also consider expenses and the underlying currency denomination; EMB and PCY are both U.S. dollar-denominated, while ELD is comprised of various foreign currencies, thereby offering an opportunity to diversify away from the greenback. The takeaway here is to always remember to take a good look under the hood of an ETF before jumping into a position. 

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Disclosure: No positions at time of writing.