WisdomTree Launches New Active Bond ETF - Asia Local Debt Fund

by: Shishir Nigam

On March 17, WisdomTree launched its latest actively-managed bond ETF, following up on the success that it has seen in its Emerging Market Local Debt Fund (NYSEARCA:ELD), which has gathered $672 million in assets since its launch in August 2010. The new fund is called the WisdomTree Asia Local Debt Fund (ALD), which will be actively managed to provide investors with income and capital appreciation through exposure to local debt denominated in the currencies of Asia Pacific ex-Japan countries. ALD will charge investors 0.55% in total expenses.

ALD already has close to $145 million of investor assets under management. The prime mandate of this fund is to provide investors with access to local currency government and agency bonds issued in Asian markets. Specifically, the Fund intends to invest in debt primarily from South Korea, Indonesia, Malaysia, Singapore, Hong Kong, China, India, Thailand, Philippines, and Taiwan. The Fund is also permitted to invest in developed market economies, such as Australia and New Zealand.

ALD started trading with initial allocations of about 11% each to bonds of Indonesia, Malaysia, South Korea, Thailand, Singapore and Australia. The other remaining countries had exposures of about 5% each.

Another distinguishing feature of ALD -- as with ELD -- is, when compared to other emerging market bond funds, that it invests in local currency-denominated, not USD-denominated, debt. This means that investors also have exposure to emerging market currencies and not just the bond exposure. Whether this turns out to be a positive or negative depends on the market performance of those currencies, of course. Considering the continued devaluation of the U.S. dollar that we are witnessing, though, it might well be advantageous for investors to diversify away from the USD.

WisdomTree’s President and COO, Bruce Lavine, said in the firm’s press release that, “We are excited to launch the Industry’s first Asia Local Debt ETF and believe the capital surpluses and strong growth and yield potential of the Asian economies make for an attractive fixed income offering.”

The fund does propose a compelling investment thesis. As has become clear over the last few years, the condition of government finances is getting increasingly worse in the developed world, thanks to substantial budget deficits, while it improves in the developing world. Seen from a fundamental and credit risk perspective, government bonds issued by emerging markets, such as those covered by ALD, are becoming increasingly attractive, especially given their substantially higher yields.

From a risk management perspective, exposure to any single country is limited to 20% of the fund. The managers will look to identify liquid debt markets that are pursuing sustainable fiscal and monetary policies. Aggregate portfolio duration will be kept between two to eight years.

This is only WisdomTree’s second actively-managed bond ETF, after ELD, and it won’t be the last. WisdomTree has active applications with the SEC for the launch of three other bond funds – WisdomTree Brazil Bond Fund, WisdomTree Latin America Bond Fund and WisdomTree EMEA Bond Fund. Going by how investors responded to ELD, there is clearly some interest in this market segment.

Disclosure: No positions in above-mentioned names.

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