Emerging Markets Debt ETFs

July 09, 2012

Over the past 12 months, the currency effect has played a much larger role than other aspects of each fund’s portfolio.

Four of the five funds focus on sovereign debt: EMB and PCY, as well as two local-currency funds: the Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) and the SPDR Barclays Capital Emerging Markets Local Bond ETF (NYSEArca: EBND).

The WisdomTree Emerging Markets Local Debt ETF (NYSEArca: ELD) is the only actively managed fund in the top five, and its managers have a longer leash in terms of security selection.

They can actively select sovereign or corporate issues that span a credit spectrum from junk to investment-grade bonds. ELD is constrained to local currency bonds however, so its recent returns closely align with EMLC and EBND, despite the differences in breadth and management.

Expense ratios for the five funds range across a relatively narrow band, from 49 bps to 60 bps. This keeps the focus where it belongs: on the fund’s basket, not its fees. Investors in EMLC will find little comfort in paying 1 basis point less than top-performing PCY.

When the pendulum swings in the other direction and emerging markets currencies start appreciating again, the local currency funds will have their day in the sun.

Until then, investors can effectively take a stand on whether that day is near or far when they choose an emerging markets debt ETF.


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