Emerging market bond sales have soared past analyst estimates for the first half of 2014, as investors flock to higher yields. $268B of bonds sold so far this year, compared to the $240B sold in the same period of 2013.
Due to a dovish Fed, U.S. yields have fallen this year to 2.5% from end-2013 levels of 3%. As a result, increased demand for higher yield has investors trading emerging market bonds despite geo-political risks.
The EGShares TCW EM Short Term Investment Grade Bond ETF (SEMF), Intermediate Term Investment Grade Bond ETF (IEMF), and Long Term Investment Grade Bond ETF (LEMF) will begin trading on January 8th; offering exposure to both sovereign and corporate bonds.
Each new fund will charge 0.65%, which is above the average expense ratio for this sector, but few funds currently offer specific duration exposure to emerging market bonds.
Emerging market bond ETF investors worried about duration risk will have their first short-duration fund to choose from starting today with the launch of ProShares' Short-Term USD Emerging Markets Bond ETF (EMSH). The fund has an expense ratio of 0.5%.
The underlying index only selects paper with a fixed rate and maturity of 0-5 years, with a weighted average yield-to-maturity of three years or less. Sovereign, and corporate - both investment and speculative grade - will be included.
As comparison, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) has a 7-year effective duration.
Market Vectors files paperwork for the Emerging Markets Aggregate Bond ETF EMAG, with an after-fee-waiver annual expense ratio of 0.49%.
The fund will hold both sovereign and corporate, and both investment grade and high-yield paper from a large number of emerging market countries. At the end of Q3, the tracked index held about 1,800 bonds from a total of 694 issuers.
Market Vectors' Emerging Markets Local Currency Bond ETF (EMLC) has just over $1B in AUM.
"Sovereign emerging-market yields today are consistent with their averages between 2003 and 2007, but U.S. Treasury rates are only about half as high," writes Shuli Ren, in a bullish piece on emerging-market debt.
The premise is simple: 17 consecutive weeks of EM bond fund outflows has "flooded out irrational exuberance that had piled up over the winter and spring" and brought the market back down to earth, even as institutional demand has remained strong, suggesting retail investors have overreacted to taper talk.
With the Fed still striking a highly accommodative tone, emerging-market debt could rally as investors discover the relatively attractive valuations.
Anything paying income is again being particularly hard hit by the rise in Treasury yields (the 10-year now at a 2-year high of 2.8%).
Selections in mREITs (REM -2.1%), (MORT -1.9%) include RAIT Financial Trust (RAS -4.1%) - whose IRT had an ill-timed IPO yesterday and Ellington Residential (EARN -4.8%) - the market not caring about reasonable Q2 performance, a hefty discount to book, and the launch of a repurchase program. Other mREITs: CYS Investments (CYS -3.6%), Apollo (AMTG -3%), Newcastle (NCT -5%), Invesco (IVR -2.7%), Arlington Asset (AI -1.2%). A leveraged ETF play: MORL.
Hanging in there relatively well are the BDCs: Fifth Street (FSC -1.3%), Triangle (TCAP -1%), MCG (MCGC -1.2%), Hercules (HTGC -1.2%), Ares (ARCC -0.3%).
Yield-starved investors are moving assets into emerging-market corporate debt ETFs, and the industry responds by upping the number of products offered to 10 from just 3 at the end of 2011. There's still plenty of room for growth - in total, such ETFs (a selection here) have about $1B AUM with the size of the EM corporate debt market at $776B. The largest U.S. corporate debt ETF, LQD alone has about $25B AUM.
The SPDR® Barclays Capital Emerging Markets Local Bond ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Barclays Capital EM Local Currency Government Diversified Index (index ticker: BLCD), an index that tracks the fixed-rate local currency sovereign debt of emerging market countries.
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