Choices For Emerging Market Bond ETFs

November 17, 2015

Local Currency Sovereign

For some investors, the appeal of investing outside of the U.S. is to capture the currency effects of these bonds. While the aforementioned ETFs do not have the currency effect, as they are USD-denominated issues, there is a plethora of local EM bond ETFs available. Additionally, investing in entities that can issue in local currency rather than in dollar-denominated bonds opens an investor up to a different set of issuer qualities.

Here is a list of local EM bond ETFs, again, with performance through Nov. 10:

As illustrated by the YTD performance column, there is not a significant amount of dispersion between these names. Here is a breakdown of allocation percentage by country:

While, for the most part, the country exposures do not vary, there are a few exceptions. The one that sticks out is South Korea. Due to differing index methodologies in emerging versus developed classifications, the iShares Emerging Markets Local Currency Bond (LEMB | C-91) has more than 20 percent exposure, while the Market Vectors J.P. Morgan EM Local Currency Bond (EMLC | C-54) and the First Trust Emerging Markets Local Currency Bond (FEMB | F) have no exposure.

As I mentioned above, a major difference in these names is the currency exposure as compared to the dollar-denominated ETFs. Additionally, the issuer exposure is also different. As such, if there were a currency-hedged local bond ETF, it would not have the same characteristics as a USD-denominated ETF.

Using the index for the SPDR Barclays Emerging Markets Local Bond (EBND | D-87) as an example, here is the local versus hedged YTD performance as compared to the same USD-denominated EMB index used above:

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