Record Inflows Favor Emerging Market Bond ETFs

Includes: EMB, PCY, TEI
by: Gary Gordon

I’ve written a number of features on “money flow” in the recent past, incorporating daily data at the Wall Street Journal and/or weekly directionality reported by the research firm EPFR Global. In fact, one month ago, I identified the enormous amount of money that was “flowing” into emerging market equities and emerging market bonds.

Four weeks has since elapsed. And, in spite of the psychological Dow 10,000 “victory,” EPFR Global reports that net assets have actually been leaving U.S. equities. Meanwhile, money market funds have not been the beneficiaries of the reported outflow.

Since the money has to flow somewhere, where have the dollars/yen/euros presumably gone? Yep… still heading into the hot emerging market stocks and equally desirable emerging market bonds.

Half of net inflows are accounted for in emerging market equities. Yet it’s still probable that a developed market sell-off would adversely affect emergers in the near-term; moreover, precious metals may be a preferred method for how a portoflio may maintain its purchasing power.

This leads me to the most critical stat in the fund flow data; emerging market bonds raked in nearly $1 billion in a single week… the largest weekly haul on EPFR’s record books.

So far, ETF investors have limited choices in emerging market bond investing. Here are 3 of the most popular trade-able funds:

1. PowerShares Emerging Market Sovereign Debt (NYSEARCA:PCY). Ever since its inception, its been one of my favorite diversifers. (Review my 11/2007 feature on why PCY may be the perfect hedge.)

Other than the worldwide liquidation of all asset classes in the credit collapse 9/08-11/08, PCY has delivered the goods. Year-to-date, PCY is up a startling 31% and remains comfortably above short- and long-term trendlines.

PCY 200-Day MA 2009Click to enlarge

2. iShares JPMorgan USD Emerging Markets Bond Fund (NYSEARCA:EMB). The coupon yield here is close to 7%, while the SEC 30-day yield is 5.5%. Some folks might think it may not be the best yield for a weighted average maturity of 12 years when you have heavy exposure to Russian and Latin American debt. On the flip side, EMB continues to demonstrate demand via 11% YTD gains and a current price above its 200-day trendline.

EMB 200-Day 2009Click to enlarge

3. Templeton Emerging Markets Income (NYSE:TEI). For starters, TEI is not a traditional ETF, but rather, a closed-end fund that trades on an exchange. Prospective investors want to consider the pros and cons of CEFs versus ETFs.

Still, TEI is not a dollar-denominated fund like the 2 mentioned earlier. This means TEI can take advantage of dollar weakness… or at least act as a hedge against the falling dollar. It currently yields 7%, and has a bit lower average credit quality than PCY or EMB.

TEI 200-Day 2009Click to enlarge

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.