Invesco Emerging Markets Sovereign Debt Portfolio ETF (NYSE:PCY) is based on Deutsche Bank's 'DBIQ Emerging Market USD Liquid Balanced Index' which tracks the performance of the most liquid EM USD Sovereign bonds. Invesco for its part uses the sampling method to achieve a similar exposure as the underlying index. You can read the fund prospectus here. Government bonds have unique risks not typically found in corporate credits and for this reason, PCY acts as a good portfolio diversifier. The fund expense ratio is 0.5%. This article will explore the composition of the ETF as well as describe the risks associated with the asset class.
ETF Composition
PCY is currently represented by 107 bond issues from 39 countries, although these amounts are subject to regularly re-balancing. Recognizing the more volatile nature of emerging market fixed income securities, the underlying index is designed in such a manner that it is able to dynamically diversify risks according to Deutsche Bank.
On an annual basis the index re-weights to diversify the allocation across all countries. All countries with two or more bonds included in the index have an equal weight, countries with one bond are allocated half this weight.
- Annually, countries and bonds are re-selected with market values reset.
- Quarterly, bonds for each country are re-selected.
- Monthly, re-balancing is done to reinvest coupons and cash positions or, when a significant event occurs such as a potential default, the bond is removed.
The outcome of this process is a well-diversified portfolio of sovereign bonds that leaves investors with a steady income stream from regular coupon payments. The ETF performance and return will be primarily based on movements in U.S. Dollar interest rates and the yield curve dynamics. The risk factor here is global credit spreads across the different quality of issuers. The underlying bonds will have specific sovereign
