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New Emerging-Market Bond ETF Offers Twist

NEW YORK ( TheStreet) -- One of the benefits of ETF proliferation is access to previously difficult-to-reach market segments for individual investors.

The latest example is the Market Vectors Emerging Market Bond ETF (EMLC). There are already two emerging-market bond ETFs, but the iShares JP Morgan USD Emerging Markets Bond Fund (EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) hold bonds denominated in U.S. dollars. The new Market Vectors fund is the first ETF to hold bonds denominated in the currencies of the issuing countries.

Country weightings range from 3% to 10%. The countries with 10% are Brazil, Malaysia, Mexico, Poland, South Africa and Thailand. Indonesia and Turkey each have 8% weights, so 76% of the fund is in just eight countries. While the process is multifactor, it boils down mostly to giving the largest weightings to the countries with the largest debt outstanding -- which could be a drag on the fund in an investment world that has a greater awareness of sovereign debt levels. For example, Brazil has a 60% debt-to-gross domestic product level and Malaysia's debt-to-GDP is around 54%. While both are well below many of the developed markets believed to be most at risk of debt problems, a country such as Chile with only 7% debt-to-GDP is not in the fund at all.

The largest holdings show as being a Thailand bond maturing in 2018 at a 7% weight and a Malaysian bond at a 6% weight. One oddity in the holdings for now is that almost 20% of the fund is in AAA paper from such issuers as Rabobank and European Investment Bank, which appear to not be emerging-market bonds. Actually they are loans made in local currencies to countries represented in the index underlying the fund, and the holdings are temporary. The fund is brand-new; as it attracts assets, the plan is that new assets will go into sovereign issues and these AAA-rated bonds will be removed.
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