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Summary

  • Emerging market bond ETFs are bouncing back.
  • A closer look at some EM debt-related ETFs.
  • Areas of strengthen in emerging bond markets.

By Todd Shriber & Tom Lydon

After ranking as one of last year's worst-performing asset classes, emerging market bonds and the corresponding exchange traded funds have bounce back in 2014.

Over the past 90 days, the dollar-denominated iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA:EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY) are up an average of 5.5% and after being riddled with outflows in 2013; the two ETFs have taken in a combined $646 million this year.

Inflows to some and bullish performances by many emerging markets bond ETFs have come amid a controversial environment that has included sovereign ratings downgrades for some of the largest country weights within these ETFs.

Even some ETFs that hold bonds denominated in emerging markets currencies, previously a toxic asset class in its own right, have proven sturdy. Take the example of the WisdomTree Emerging Markets Local Debt Fund (NYSEARCA:ELD).

The $908.8 million actively managed WisdomTree Emerging Markets Local Debt Fund is up 2.2% since Standard & Poor's lowered Brazil's credit rating to BBB-, the lowest investment grade. That is no small feat considering ELD allocates nearly 11.1% of its weight to real-denominated debt.

ELD offers exposure to 16 countries, all of which carry investment-grade ratings from at least one major ratings agency. The ETF is also up nearly 1% over the past month, a period in which Russia saw its credit rating trimmed to BBB-. Russia accounts for 6.7% of ELD's weight.

ELD has an effective duration of 4.72 years with an average yield to maturity of 6.03% and a distribution yield of 3.36%. Nearly two-thirds of the ETF's holdings are rated A or BBB, according to issuer data.

The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA:EMLC) is up 4.3% over the past 60 days. The passively managed rival has a combined 34.6% weight to Brazil, South Africa, Russia and Turkey.

While South Africa and Turkey have not been hit with ratings downgrades as of yet, South Africa was recently surpassed by Nigeria as Africa's largest economy. More importantly, both S&P and Moody's have lowered their outlooks on Turkey to negative from stable this year, exacerbating the country's historically fractious relationship with ratings agencies. Despite that, Turkish equities and the lira have rallied.

EMLC has an effective duration of 4.43 years and a yield to worst of 5.72%. A combined 61% of the ETF's holding are rated A or BBB.

Granted, it is a dollar-denominated fund, but one of most impressive recent performances turned in by an emerging markets bond ETF comes courtesy of the iShares Emerging Markets High Yield Bond ETF (BATS:EMHY).

The $183.7 million EMHY is up 7.4% over the past 90 days and that is with nearly a quarter of the fund's combined weight going to Turkey, Russia and Brazil. That does not include the 13.8% allocation to Venezuela, a country that has been wracked by hyper inflation, or a 2.8% weight to Ukraine.

EMHY's effective duration is almost 5.8% years with a 30-day SEC yield of 6.37 years. A combined 45% of the ETF's holdings are rated BB+ or BB by S&P.

iShares Emerging Markets High Yield Bond ETF

(click to enlarge)

Tom Lydon's clients own shares of EMB.

Source: EM Bond ETFs Surviving Plenty Of Controversy