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WisdomTree Emerging Markets Local Debt Fund ETF (NYSEARCA:ELD)

This active ETF holds emerging market country debt denominated in local currency. They recently changed the portfolio review process to semi-annual which is a positive sign although given the fast moving markets they invest in, this is not enough for our screen.

The Asia region holds 37%, Europe-Middle East and Africa 32% and Latin America 30%. The duration is 4.12 with an SEC yield of 5.50%. This ETF holds approximately $1 billion in assets and should be sold for the following reasons. While the interest rate risk is reasonable for the yield compensation, given the fast moving dynamics of these markets, it lacks necessary nimbleness. There is value in some emerging market bonds but it takes a team with quick trading ability to determine those values amid a crisis type rout. There was almost no chance that this ETF would have stepped out of the way of the runaway train in the past year because of its narrow mandate. A firm would need an in-depth view on the monetary policies of the major countries' and regions' in this fund in addition to a clear view on real interest rate value to warrant a purchase.

The credit profile includes approximately 40% in bonds rated BBB or below and since credit conditions can change we prefer an active manager who can extract value more than every six months.

It has lost 14% for the prior year.

iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA:EMB)

This passive ETF holds emerging market country debt denominated in U.S. dollars.

The largest countries represented are Russia, Brazil, Mexico and Turkey. The duration is 6.94 with an SEC yield of 5.19%. This ETF holds approximately $3.4 billion in assets and should be sold for the following reasons. The interest rate risk is not reasonable for the yield compensation, given the need for some of the countries to raise their interest rates to save their currency, it lacks necessary nimbleness. There is value in some emerging market bonds but it takes a team with quick trading ability to take advantage of those values amidst a crisis type rout. There was almost no chance that this ETF would have stepped out of the way of the runaway train in the past year because of its narrow mandate. A firm would need an in-depth view on the monetary policies of the major countries' and regions' in this fund in addition to a clear view on real interest rate value to warrant a purchase.

The credit profile is "bb" and since credit conditions can change we prefer an active manager who can extract value and avoid overvalued debt. Unless an investor has a high conviction view with respect to $ denominated EM Sovereign Debt, we highly recommend avoiding this product and to sell it and to seek an active manager.

iShares Emerging Markets Local Currency Bond ETF (NYSEARCA:LEMB)

This passive ETF holds emerging market country debt denominated in local currency.

The largest countries represented are South Korea and Brazil at 30% of the fund. The duration is 4.08 with an SEC yield of 5.18%. This ETF holds approximately $611 million in assets and should be sold for the following reasons. The interest rate risk is not unreasonable for the yield compensation, however; given the need for some of the countries to raise their interest rates to save their currency, it lacks necessary nimbleness. There is value in some emerging market bonds but it takes a team with quick trading ability to take advantage of those values amid a crisis type rout. There was almost no chance that this ETF would have stepped out of the way of the runaway train in the past year because of its narrow mandate. A firm would need an in-depth view on the monetary policies of the major countries' and regions' in this fund in addition to a clear view on real interest rate value to warrant a purchase.

The credit profile is "bbb" and since credit conditions can change we prefer an active manager who can extract value and avoid overvalued debt. Unless an investor has a high conviction view with respect to local currency denominated EM Sovereign Debt, we highly recommend avoiding this product and to sell it and to seek an active manager.

Zenith recommends active management for these three areas

• Currency-A lack of active selection leaves the investor vulnerable to the current currency weights in the passive basket. It is an area to extract value and to hedge exposure to reduce the overall risk profile.
• Credit risk-Given the complexities of credit research, we would prefer a team that has the time and experience to find value across credit upgrade opportunities as well as overvaluation in downgrade scenarios.
• Duration-There are a lot of interest rate curves and a variety of monetary policies to analyze and that is best left to a seasoned management team.

Source: Emerging Market Debt ETFs With Much Risk