Emerging Market Local Debt ETFs Shine

March 23, 2017

Weakening Dollar Helps

The other good news for emerging markets is the fact that the dollar has given up ground recently, not strengthened—the greenback has declined nearly 3% year-to-date.

As Research Affiliates wrote in 2015, there are three key truths about emerging markets as they relate to developed markets, and more specifically, the dollar:

  • A better economic outlook and higher yields in the United States have been typically followed by stronger growth, rising risk appetites, and capital inflows in emerging economies.
  • A strong dollar is not the cause of emerging market struggles. Quite the contrary: a strong dollar is result of an adjustment process that, historically, has fed their economic recovery.
  • Emerging markets are a heterogeneous group of countries that over the years have built significantly larger reserves and a domestic debt market. Hence, the likelihood of observing widespread currency and banking crises has decreased.

Differences In Exposure

These ETFs offer access to sovereign debt from some of the largest emerging market economies—many of which have strong domestic consumer-driven demand as well as positive commodity-export stories. Here’s a quick overview of what you get with each of these five portfolios:

VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (EMLC)

EMLC, which allocates across some 20 emerging markets, tracks an index that has Mexico and Brazil as its largest currency exposure, at about 20% of the mix. So far this year, the Mexican peso is up 8%, while the Brazilian real is up 5%. EMLC, the largest of the bunch, costs 0.47% in expense ratio—somewhere in the middle range for this segment. The fund, with some 247 holdings, has a 30-day yield of 5.8% and is up 6.43% this year.

First Trust Emerging Markets Local Currency Bond ETF (FEMB)

FEMB, the best-performing of the group, with a 6.89% return so far this year, is also the most expensive, with a 0.85% expense ratio, and is the smallest among these five ETFs, with $25 million in assets. The fund is also actively managed, unlike most of its counterparts. FEMB, which owns a broad range of sovereign bonds, currently has a 30-day yield of 5.0%. FEMB’s largest country allocation is Brazil, at nearly 15% of the fund.

 

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