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Top 10 High-Yield, Emerging-Market Bond ETFs

EMB Top Ten Holdings

  1. Philippines Rep 7.75%:                        4.11%
  2. Republic Of Turkey 7.25%:                 4.10%
  3. Republic Of Turkey 6.875%:               3.82%
  4. Russian Federation 7.5%:                    3.54%
  5. Brazil Federative Rep 7.125%:            2.94%
  6. Kazmunaigaz Finance 9.125%:            2.79%
  7. Republic of Indonesia 6.875%:                        2.74%
  8. Republic of Peru 6.55%:                      2.68%
  9. Republic of Lebanon 9%:                    2.62%
  10. Petronas Capital 5.25%:                       2.51%

 

PCY (PowerShares Emerging Markets Debt ETF) is based on the DB Emerging Market USD Liquid Balanced Index. This is another more actively adjusted index using a theoretical portfolio of emerging market debt instruments. The country debt is reselected annually based on a proprietary methodology. The ETF was launched in November 2007. The expense ratio is .50%, AUM is $1B and average daily trading volume is around 425K shares. Through March 2011 PCY returned 6.89%. The funds average duration is roughly 8.5 years and 47% of assets posses a credit quality of BBB with the balance mostly of a lesser rating.

Data as of June 2011

PCY Top Ten Holdings & Weightings

  1. Bulgaria Rep 8.25%:                4.26%
  2. Korea Rep 5.125%:                 2.31%
  3. Lithuania Rep 6.75%:   2.28%
  4. Vietnam(Soc Rep) 6.875%:      2.27%
  5. Hungary Rep 4.75%:               2.25%
  6. Vietnam (Soc Rep) 6.75%:       2.22%
  7. Croatia(Rep Of) 6.625%:         2.20%
  8. Pakistan(Rep Of) 6.875%:       2.20%
  9. Croatia(Rep Of) 6.75%:           2.06%
  10. Hungary Rep 6.25%:               2.06%

ELD (Wisdom Tree Emerging Markets Local Debt Fund) doesn't seem to be following an established index that we can tell. It's based on local currency issues from a variety of emerging market countries. If there's pressure on the US dollar then perhaps some country currencies will outperform adding more to returns. Naturally the opposite can be the case. The fund was launched in September 2010. ELD has an expense ratio of .55%, AUM of 875M and average daily trading volume of 327K shares. The credit quality is quite mixed with most assets greater than BBB which is unique for the category. The average duration is less than 10 years while the average yield to maturity is 5.75%.

Data as of June 2011

ELD Top Ten Country Weightings

  1. Mexico                         11.22%
  2. Brazil                            11.22%
  3. Indonesia                     11.13%
  4. Malaysia                       11.04%
  5. South Korea                 7.46%
  6. Turkey                         7.41%
  7. South Africa                 7.37%
  8. Thailand                       7.30%
  9. Poland                         7.29%
  10. Peru                             3.86%

ALD (Wisdom Tree Asia Local Debt ETF) is another offering from Wisdom Tree not tied to a particular index. Clearly the focus is to focus on Asian market debt (ex-Japan) with the idea to capture both yield and perhaps even enhanced return from local currency appreciation. This, of course, is a door that swings both ways. The fund was launched in March of 2011 and has already captured $442M in AUM with average daily trading volume of 138K shares. The expense ratio is .55%. Asset quality is quite mixed with 43% AAA and 43% Non-rated. Some of this is due to the unique nature of using forward contracts to buy securities. The average duration of the fund is between 2-7 years. The holdings data below are roughly approximate and due to the turnover in the portfolio due to forward contract rollover is hard to assess.

Data as of June 2011

ALD Top Ten Holdings & Weightings

  1. Dreyfus Instl Preferred Money Market Prime:                         9.37%
  2. Government of Singapore 1.625%:                             6.26%
  3. Government of Singapore 2.5%:                                 4.35%
  4. Government of New Zealand 6%:                                4.30%
  5. Republic of the Philippines 4.95%:                              4.18%
  6. Kingdom of Thailand 5.25%:                                        3.88%
  7. Inter-American Development Bank 4.75%:                   3.44%
  8. Malaysia: 3.43%                                                           3.39%
  9. European Investment Bank 7.25%:                              3.11%
  10. Republic of Korea 3.75%:                                            3.00%'

EMLC (Market Vectors Emerging Markets Local Currency Bond ETF) is another relatively new issue from Van Eck which is similar in theme to what we've just noted from Wisdom Tree. What distinguishes it among other things is that it's linked to and index: JP Morgan Government Bond Index Emerging Markets Global Core Index (a mouthful that's for sure).  The expense ratio is .49% and the fund was launched July 2010. AUM equal $370M and average trading volume is 132K shares. As per an interview done last fall with Van Eck their goal is to achieve yield and return using emerging market debt in local currency. The average maturity is roughly 6.5 years and credit quality is primarily investment grade with only 13% below investment grade. The YTD return has been roughly 4% and the average yield to maturity is 6.35%. 

 

Data as of June 2011

EMLC Top Ten Holdings & Weightings

1.    Transnet Ltd South Africa 10.80%                               3.32%

2.    Egypt Government 8.75%                                            3.00%

3.    Chile Government 5.50%                                             2.96%

4.    Banco do Brasil 9.75%                                                 2.45%

5.    Republic of Colombia 12%                                           2.33%

6.    Republic of Philippines 4.95%                                     2.08%

7.    Brazil Letras Do Tesouro Nacional 0%                         2.07%

8.    Poland Government 5.50%                                          1.91%

9.    Turkey Government Bond 11%                                   1.83%

10.  Republic of Colombia 7.75%                                        1.59%

Once again we've chosen to keep the list to 10 although other issues are and will continue to make their presence felt. All of this is a matter of choice for any investor. These lists remain long and sometimes quite repetitive as components vary little one to another. The real choice here remains in other factors beyond maturity risk but go to quality assessment and risk.

While the quest for yield given stock market loathing and changing demographics dominate investment preferences, investors are advised to recognize added risks inherent in high yield and emerging market debt. Even should global interest rates drop due to economic weakness this may not transfer to weaker credits as some may suffer serious declines in such an environment. I've seen this happen frequently.

As stated with other sectors, remember ETF sponsors must issue and their interests aren't aligned with yours. They have a business interest and wish to have a competitive presence in any popular sector.

For further information about portfolio structures using retail or other ETFs see www.etfdigest.com .

You may address any feedback to: feedback@etfdigest.com   

 

(Source for holding data is from ETF Database and from various sponsors.)

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

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