Many deem developing country debt as a "risky" investment. However, emerging market bond exchange traded funds are comprised of investment-grade credit, and a WisdomTree offering even holds a high-quality NAIC designation.
According to a press release, the WisdomTree Emerging Markets Local Debt Fund (NYSEARCA:ELD), which holds emerging market bonds denominated in their respective local currency, recently received a risk-based capital designation of 1 (-) from the Securities Valuation Office of the National Association of Insurance Commissioners .
"NAIC 1 is assigned to obligations exhibiting the highest quality," according to NAIC. "Credit risk is at its lowest and the issuer's credit profile is stable. This means that interest, principal or both will be paid in accordance with the contractual agreement and that repayment of principal is well protected."
The office assigns credit quality designations on securities held by state-regulated insurance companies that range from NAIC 1, the highest quality, to NAIC 6, the lowest.
With a NAIC designation, ELD can now be reported as a bond security by insurers, an important distinction for risk-based capital purposes.
Additionally, this designation will provide a whole new pool of investment opportunities for ELD. Insurance companies look for yield when they invest the premiums, and ETFs let them buy a basket of bonds rather than researching individual securities.
"This Designation places ELD within the highest credit quality rating category," Rick Harper, WisdomTree Head of Currency and Fixed Income, said in the press release. "We believe the ratings of our fixed income funds will be instrumental in broadening the pool for assessment and consideration among insurance companies when managing their risk-based capital requirements."
Additionally, the WisdomTree ELD ETF itself holds a range of bond credit qualities, including AAA 10.9%, AA 6.5%, A 31.2%, BBB 27.2%, BB 10.4% and NR 13.5%. Anything below BBB is considered speculative grade, so the majority of ELD's holdings are investment grade quality.
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.