iShares EM Bond ETF To Cost 0.60%

October 13, 2011

BlackRock unit iShares filed updated regulatory paperwork stipulating for the first time that its planned iShares Emerging Markets Local Currency Bond Fund will trade under the symbol “LEMB” and have an annual expense ratio of 0.60 percent, making it more expensive than competing funds already on the market.

Although emerging market equities are reeling amid signs of slowing global growth, developing market debt is increasingly viewed as stable investment, and in the past year, sovereign debt denominated in local currencies has clearly revealed itself to be a hotspot in the world of ETFs.

WisdomTree’s Emerging Markets Local Debt ETF (NYSEArca: ELD) had $1.11 billion in assets under management as of Oct. 12, while Van Eck’s Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) had $494 million, according to data compiled by IndexUniverse. Both were rolled out a bit more than a year ago.

Updated regulatory filings including price and ticker symbols quite often indicate that a given fund’s launch is coming soon if not imminent. LEMB will trade on Arca, the New York Stock Exchange’s electronic trading platform.

An ETF Hotspot

iShares already has had great success with a first-generation, dollar-denominated, emerging market debt fund that it sponsors, the JP Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB). EMB, which iShares launched in December 2007, has $3.07 billion under management and is the biggest emerging markets debt ETF.

Its planned fund, LEMB, is a passive fund that will track a Barclays Capital benchmark of more than 270 bonds from sovereign and local currency bond markets such as Brazil, Chile, Egypt, and Hungary.  The fund will use a representative sampling strategy rather than replicate the credits in the index.

As noted above, with its expense ratio of 0.60 percent, LEMB is more expensive than its competition.  EMLC has a net expense ratio of 0.49 percent and ELD, an active ETF, has an expense ratio of 0.55 percent.

To make it into LEMB, a given debt issue will have to have the local currency equivalent of $1 billion, according to the SEC filing, which also said the fund could contain an undefined amount of futures and options.

While the ETF market has been treating emerging market debt a secure investment iShares noted in its SEC filing that the asset class has certain inherent risks.

Currency Risk Cuts Both Ways

One obvious risk is that because the fund’s net asset value is determined on the basis of the dollar, investors stand to lose money if the currency of a non-U.S. market in which the fund invests depreciates against the dollar.

The opposite is true in dollar-denominated emerging market debt funds such as iShares’ own EMB or the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), which benefit from a stronger dollar.

Of course, for much of the past decade, the dollar has been losing value to many emerging market currencies, such as the Brazilian real, which is a boon to funds such as ELD and EMLC and would be to LEMB when it comes to market.

That secular trend has shown a tendency to be stopped dead in its tracks whenever global financial markets are roiled with uncertainty, as in the past few months. Indeed, investors have scurried to dollar-denominated assets such as U.S. Treasurys amid signs of slowing global growth and a plodding policy response in Europe to the continent's substantial debt-related problems.

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