EM Bond, Treasury ETFs Top April Flows

April 30, 2014

More than $3 billion in assets flowed into fixed-income ETFs in April.

Investors poured more than $3.25 billion into U.S. and international bond ETFs in April, and no fixed-income segment was more popular than emerging market bond funds. Long-dated U.S. Treasury ETFs came in second.

In the past month, more than $1.08 billion flowed into international bond ETFs—roughly twice the asset flows seen into the segment in the entire first quarter. Our data show that it was emerging market sovereign debt funds that led in net creations, attracting $671 million in April alone—the most popular fixed-income segment in the period.

Funds like the iShares J.P. Morgan USD Emerging Markets Bond (EMB | B-24)—the largest passively managed dollar-denominated emerging debt portfolio, with more than $4.3 billion in total assets—raked in a net of $553 million in April.

The flows came at a time when spreads over Treasurys are compressed below historic levels, which makes it harder for investors to find income opportunities that avoid interest-rate risk, Kathleen Gaffney, vice president and fixed-income expert at Eaton Vance, recently said in a commentary.

“Emerging-market debt, on the other hand, has gotten cheaper due to the sell-off over the past year,” she said. “This comes as investors have begun to price in not only the end of the Fed’s quantitative easing, but an eventual rise in the Fed’s base rate, effectively raising the bar on the so-called carry trade on emerging-market currency short-term yields.”

EMB tracks an index of dollar-denominated sovereign debt issued by emerging market countries with more than $1 billion outstanding, and at least two years remaining in maturity. The majority of the portfolio is tied to bonds with at least five years remaining to maturity, giving it an overall duration of 7.2 years for a 30-day SEC yield of 4.7 percent.

The much smaller Vanguard Emerging Markets Government Bond ETF (VWOB) saw net inflows of $15.5 million in the past month.

It’s worth pointing out that not all emerging market sovereign debt funds were equally popular. Local-currency denominated portfolios such as the Market Vectors Emerging Markets Local Currency Bond (EMLC | C-57) and the SPDR Barclays Emerging Markets Local Bond (EBND | C-79) actually bled assets in April, to the tune of $14 million and $9 million, respectively.

These types of funds expose investors to additional currency volatility risk, where dollar-denominated debt funds minimize that risk. However, they don’t completely erase that risk. Any significant strengthening of the dollar would make debt servicing more expensive for these issuers, according to ETF.com Analytics. Year-to-date, the dollar as measured by the U.S. dollar index is largely flat.

Year-to-date, emerging market bond ETFs have posted relatively strong gains after bleeding anywhere between 2 and 10 percent in 2013.

EMB_EMLC_VWOB_EBND_YTD_Perf

 

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