iShares Plans 2 Emerging Corporates ETFs

Cinthia Murphy
January 31, 2012

iShares plans two emerging markets corporate bond funds, including one focused on junk.

iShares, the world’s largest purveyor of ETFs, is looking to expand its reach into the emerging market space with two fixed-income ETFs that would serve up first-of-a-kind access to junk bonds and corporate debt throughout the region.

Both the iShares Emerging Markets High Yield Bond Fund and the iShares Emerging Markets Corporate Bond Fund will be linked to Morningstar indexes and will comprise dollar-denominated debt, the company said in two separate filings it submitted to U.S. regulators. Tickers and fees weren’t disclosed.

Emerging market fixed-income ETFs aren’t new, especially dollar-denominated funds, but they are growing in popularity. Owning dollar-denominated emerging market debt is seen by many as a way of stabilizing exposure to developing economies, which can be known for economic and political volatility.

Funds like iShares’ own iShares JPMorgan USD Emerging Markets Bond Fund (NYSEArca: EMB) have resonated with investors, attracting some $3.5 billion in assets since its 2007 inception. Invesco PowerShares also has had a success story with its take on dollar-denominated emerging market debt, its “PCY” fund, which boasts $1.4 billion in assets.

Still, the new iShares funds would be the first to serve up focused access to junk bonds and to corporate debt in the region, respectively.

Avoiding Local Currency Exposure

The filings are a departure from much of the recent buzz surrounding emerging market debt strategies, which have focused on local-currency-linked exposure. The WisdomTree Emerging Markets Local Debt ETF (NYSEArca: ELD) has become the poster child of this trend. The fund has gathered $1.08 billion in a year and a half.

Since then, other providers like New York-based Van Eck, PowerShares and iShares, and even most recently Emerging Global, have taken steps to capture some of that growing investor demand for local currency debt exposure, which is designed to benefit from any weaknesses in the U.S. dollar.

The Details

The new iShares Emerging Markets High Yield Bond Fund would invest in below-investment-grade dollar-denominated sovereign and corporate bonds in a mix that is rebalanced monthly.

Eligible securities must have a minimum outstanding face value of $500 million, with eligible issuers having an aggregate outstanding debt of at least $1 billion, the filing said.

Single issuers are capped at 23 percent of the portfolio, and the total sum of all issuers representing more than 5 percent of the basket cannot exceed 48 percent of the overall portfolio, the filing said.

By comparison, the company’s corporate debt portfolio would follow the same size guidelines, meaning securities must have a minimum outstanding face value of $500 million, with issuers owning at least $1 billion in aggregate outstanding debt.

The bonds must have at least 13 months to maturity at the time of rebalancing, which will take place on a monthly basis. But individual issuers are capped at 5 percent of the portfolio.

At the end of September, the corporate bond fund’s underlying index included bonds issued by corporations and quasi-sovereign corporations from some 19 countries, including Brazil, Hong Kong, India, Russia and Qatar.

iShares’ high-yield bond portfolio is broader, including some 25 countries in the mix.



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