Helping fixed-income investors diversify portfolio holdings with international exposure, Invesco PowerShares plans to launch a local currency emerging market bond exchange traded fund.
The PowerShares Fundamental Emerging Markets Local Debt Portfolio (PFEM) will begin trading Thursday, May 9. The fund has a 0.50% expense ratio and provides yield distributions monthly.
PFEM is linked to Rob Arnott's Research Affiliates' fundamental indexing methodology - the ETF passively tracks the index, but the benchmark is a type of rules-based index that mimics actively managed strategies.
The ETF will try to reflect the performance of the Citi RAFI Bonds Sovereign Emerging markets Extended Local Currency Index, which includes emerging market debt and weights holdings based on a country's population, GDP, energy consumption and land area.
"This approach breaks the link between portfolio weight and any over- or undervaluation, creating the potential for more efficient portfolio," according to an emailed note.
In contrast, a market-cap weighted methodology would overweight countries that issue more debt.
According to a prospectus filing, the underlying index includes bonds issued by 18 governments, including Brazil, Chile, China (Offshore), Colombia, the Czech Republic, Hungary, Indonesia, Israel, Malaysia, Mexico, Peru, the Philippines, Poland, Russia, South Africa, South Korea, Thailand and Turkey.
Since the emerging market local debt portfolio is issued in bonds denominated in the local currencies of their respective emerging markets, the bond ETF is subject to currency risks - a strong U.S. dollar would weigh on the performance of the local debt ETF.
PowerShares also offers a U.S.-dollar denominated emerging market bond, PowerShares Emerging Markets Sovereign Debt Portfolio (PCY).
PFEM will also be competing against other local currency emerging market debt ETFs, including WisdomTree Emerging Markets Local Debt Fund (ELD), Market Vectors Emerging Markets Local Currency Bond ETF (EMLC), iShares Emerging Markets Local Currency Bond ETF (LEMB) and SPDR Barclays Emerging Markets Local Bond ETF (EBND).
Max Chen contributed to this article.