Two New ETFs: Emerging Market Bonds, Buy/Write

Just as Bobby Petrino left Atlanta under cover of darkness, so too did two very interesting ETFs get quietly listed Thursday.

The first is iShares JP Morgan USD Emerging Market Bond Fund (EMB) with a hat tip to 24/7 Wallstreet.

Based on the name I infer that the bonds are dollar denominated like the similar PowerShares product (PCY).

The average coupon is 7.76% but the average price (assuming that means price paid) is over $110, so the yield is probably in the sixes. In fact, I found an average yield to maturity of 6.29% on the iShares page but can't vouch for that.

EMB is heaviest in Brazil, Russia, Turkey and Venezuela with ten countries in all.

The other fund is the PowerShares S&P 500 Buy Write Portfolio (PBP) with a hat tip to me as I found it on the home page when I went to compare EMB to PCY. I exchanged emails with someone at PowerShares about this fund a week or two ago and was told it is an ETF (as opposed to the ETN from Barclays) and it will pay a dividend.

I am excited (wow I am a nerd) about both of them. I will say easy does it on PBP for a while. While I am sure this is wrong, this strikes me as a candidate for having unintended consequences. I really do hope I am wrong as I would like to use it but it will need to prove itself before I do.

• More on Emerging Market ETFs

Comments

[Elliott:]

I'm not sure the buy-write ETF will be a good deal when you can buy BEP, IQ IA's closed end fund, for a 7% discount to NAV. Why buy the same assets at par (the ETF) when you can have them on sale (the CEF). No doubt the ETF will have a lower management fee but the discount on the CEF is much higher.

BEP has been paying out $2/sh per year in distributions for three years running and is yielding 13% at the current price.

2007 Dec 22 01:07 PM

[Roger Nusbaum:]

What's to say that BEP's discount doesn't get wider? What's to say it doesn't stay exactly where it is? Point being for some folks gaming the moves in the discount is not ideal. For anyone who is comfortable with the discount/premium issue then the CEF might be better, yes.

I have not looked but is any of BEPs dividend a return of capital?

I further wonder if the mere existence of PBP will cause BEP's discount to move or if BEP's existence will cause PBP to have a larger discount than normal for an ETF.

2007 Dec 22 07:50 PM

[Elliott:]

When I buy a closed end fund at discount I don't buy with the assumption that I will profit from the fund somehow returning to par value. Instead, I look at the discount as a safety cushion: if the discount gets much more than 10 or 15 percent bargain hunters and value investors tend to provide support.

In 2006, 19 cents out of the $2.00 paid to BEP shareholders was return of capital, according to BEP's prospectus.

To check the health of a CEF I believe you want to watch the NAV, not the price. I steer clear of CEF's that bleed asset value. For 2007, BEP's NAV when adjusted for the distributions appears to be matching the S&P500. The index is up 4.8%, while BEP's NAV is up 5.7% once the $2 payouts are included. If 19 cents return-of-capital is assumed, BEP's NAV is up 4.6%. BEP's fund managers seem to be doing a good job of collecting index option income while maintaining NAV relative to the S&P 500 index.

BEP's price performance has been poor as it swung from premium to discount. Even with the distributions BEP is down -7.2% for the year. That illustrates why I never buy CEF's at par or at a premium. But, again, based on BEP's managers handling of the fund's NAV I think BEP is a good buy at a discount.

2007 Dec 23 12:10 PM

[Roger Nusbaum:]

good stuff Elliott.

I would add however that the market price can tell you some things too. A client asked me about a different CEF that has gotten killed as the NAV is down a little, the market price down A LOT as the discount has become much wider. And the provider has a similar fund that is not down anywhere near as much

I tend to view that as the market saying something about the fund. I am probably not smart enough to know what the market is saying but I am inclined to heed that warning.

2007 Dec 24 11:16 AM