Another Way to Play Emerging-Market Bonds

The other day I mentioned that PowerShares would soon launch an exchange-traded fund that invests in emerging markets, and before the virtual ink could dry, it did.

The PowerShares Emerging Market Sovereign Debt Portfolio(PCY) debuted Oct. 11. I believe it offers a way to invest in emerging market bonds with potentially less volatility than closed-end funds.

There are a number of closed-end funds that invest in emerging market bonds, but their share prices tend to drop below their net asset values during times of market crisis. That's because closed-end funds issue a fixed number of shares. When the assets they invest in are out of favor, their shares can sell off faster than the underlying securities.

But ETFs can issue new shares to meet demand or dissolve existing shares into their component securities. This means they rarely deviate from their net asset values by significant amounts or for any length of time.

The word "sovereign" means that PCY will own only government debt, no corporates. It looks to be a concentrated fund. It has only 25 holdings, most of the countries in which it has exposure appear to be very high-yielding, and there is a hint of active management. The index that underlies the fund, which is from Deutsche Bank(DB), selects and weights 17 countries via a proprietary process and then rescreens for the 17 countries every year.