On Monday Van Eck Associates of New York City proudly
announced that its Market Vectors Emerging Markets Local
Currency Bond ETF (EMLC), launched in July of 2010, had
surpassed the $1 billion mark in assets under management.
Van Eck is not alone in hitting that mark. WisdomTree of New
York City has attracted $1.39 billion in assets since launching
its WisdomTree Emerging Markets Local Debt Fund (ELD) in August
of 2010. Even the smallest of the emerging-markets
local-currency bond funds iShares Emerging Markets Local
Currency Bond Fund (LEMB), which was launched more recently in
October of 2011 is reporting an inflow of $155 million in the
past month for total assets under management
of $364.79 million.
So why are emerging-markets local-currency bond ETFs
suddenly all the rage?
The majority of the money in this sector is still in ETFs
comprised of dollar-denominated emerging-markets bonds. To put
it into perspective, the largest of the emerging-markets
dollar-denominated bond ETFs iShares J.P.
Morgan USD Emerging Markets Bond Fund
(EMB) has a whopping $6.39 billion in assets
under management. But the local-currency bond sector is gaining
I think investors are realizing that investing in the
emerging markets is actually a double bet; you not only have to
invest in the asset class in this case, a
sovereign bond or a corporate bond but you
also have to invest in that currency, says Dave Nadig,
the director of research at IndexUniverse in San Francisco.
If you invest in U.S. dollar-denominated emerging bonds,
youre effectively neutralizing the potential for that
currency gain, he says.
Part of the attraction is the obvious: the yields. Compared
to U.S. Treasuries, any yield thats not measured in basis
points would be appealing at this point. But the simple yields
on these ETFs dont tell the full story because with
currency gains, their performance can be far greater.
For instance, Van Ecks ETF has a 30-day SEC yield of
4.87 percent as of November 27, but a 12.84 percent gain in net
asset value year-to-date as of October 31. WisdomTrees
ETF has a 30-day SEC yield of 3.85 percent, but a total return
of 13.93 percent since inception through October 31.
iShares 30-day SEC yield is 3.74 percent, but a 7.51
percent gain in its net asset value from inception through
Thats a level of return youre not seeing
in very many other places in the marketplace, Nadig
But its not just an investment driven by
enhanced yields, says Francis Rodilosso, the co-manager
of Van Ecks ETF. Investors want diversification
away from the dollar and the euro, he says, noting that
many emerging-markets countries now have stronger balance
sheets, debt to GDP ratios that are far lower, fairly healthy
foreign reserves relative to the size of their debt and their
central banks are not printing money, he says.
WisdomTrees head of fixed income and currency, Rick
Harper, notes that as of its latest fact sheet, 97 percent of
the ETFs investments in local-currency emerging bonds
were investment grade, and thats one of the big
surprising things for a lot of people, he says, noting
that when it comes to the balance sheets of the
emerging-markets countries versus the developed world, the
emerging-markets countries are now largely net creditors, while
the developed countries are largely net debtors. The way the
picture has completely flipped over the last ten
years is a pretty amazing phenomenon, he says.
Another part of the ETFs appeal is that investing in
local-currency bonds in the emerging markets would otherwise be
cumbersome, notes Stephen Laipply, a product
strategist for iShares. For instance, the iShares ETF has its
largest investment 21.08
percent in South Korea, but buying government
bonds in South Korea is a bit of a tedious process; you
have to go through the central bank, he says.
WisdomTrees ETF is actively managed, with an expense
ratio of 55 basis points, while the other two are passively
managed Van Ecks with an expense ratio
of 47 basis points and iShares with 60 basis points.