Van Eck Plans Two Fixed-Income ETFs

March 04, 2010

Van Eck, a New York-based ETF and mutual fund firm that specializes mostly in natural resources investments, plans to launch two first-of-their-kind fixed-income ETFs—one focused on nondollar-denominated emerging market debt and the other on floating-rate investment-grade bonds.

The two funds now in registration with the Securities and Exchange Commission would increase the number of the company’s Market Vectors ETFs to 26. The new ETFs include the Market Vector Emerging Markets Local Currency Debt ETF and the Market Vectors Investment Grade Floating Rate ETF.

The two fixed-income funds come at a time when investor concern about interest-rate increases by the Federal Reserve is mounting after the
U.S. central bank cut official rates to almost zero in the aftermath of the worst economic crisis since the 1930s. Bond prices fall when rates rise, and investors are scouring the landscape for securities that will fare relatively well when the Fed starts to tighten credit.

The emerging market debt ETF will track an index of fixed-rate sovereign debt, supranational issues and corporate bonds with at least a year to maturity and a minimum outstanding value equivalent to $100 million. Investors in two-year Indian paper are earning yields in excess of 6 percent, versus less than 1 percent in the U.S. and 2 percent throughout Europe, according to data compiled by Bloomberg.

The floating-rate ETF will focus on investment-grade bonds, also with at least one year to maturity at the time of each index rebalancing. Floating-rate securities don’t lose their value in an environment of rising interest rates the way regular bonds do.

Both funds will use derivatives such as options, swaps and futures, according to the filing.Van Eck’s Director of Marketing Ed Lopez declined to comment pending SEC approval, which is required before the company can roll out the funds.

Blazing A New Trail

Both of Van Eck’s planned offerings blaze a new trail for
U.S. investors.

The other two existing emerging-market bond ETF are denominated in dollars. They include the $1.2-billion iShares JP Morgan Emerging Markets Bond ETF (NYSEArca: EMB) and the $468 million PowerShares Emerging Markets Sovereign Debt ETF (NYSEArca: PCY).

Both ETFs beat the Standard & Poor’s 500 Index’s 26 percent rise in 2009. PCY’s underlying index, the DB Emerging Markets USD Liquid Balanced Index, returned almost 36 percent in 2009, while EMB’s benchmark, the JP Morgan EMBI Global Index, gained 28 percent.

Van Eck’s proposed floating-rate bond fund would also be the first of its kind in the U.S. ETF market.

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