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Why It Pays to Own These Emerging Markets Bonds

During the past year, WisdomTree's fund has had inflows of $433 million and now ranks as the biggest local currency fund with $1.5 billion in assets. Market Vectors Emerging Markets Local Currency has $1.2 billion. The biggest emerging markets dollar ETF is iShares JPMorgan USD Emerging Markets Bond (EMB) with $6.9 billion.

While Market Vectors is a passive fund, the WisdomTree local currency fund is actively managed. Favoring higher quality issues, WisdomTree's portfolio has a solid investment-grade rating of A. "We overweight countries that have really clean balance sheets," says portfolio manager Rick Harper.

Harper is particularly keen on Asian countries, such as Malaysia and Indonesia. Those have limited debt and growing economies. To control risk, Harper has 11% of assets in local currency issues from supranational agencies, such as the World Bank, which carries the top rating of AAA.

The Market Vectors fund has an average credit quality of BB, one step below investment grade. The lower-quality names come with more risk, but they deliver richer yields. Market Vectors yields 4.1%, compared to a yield of 3.6% for the WisdomTree Fund. At a time when U.S. bonds pay skimpy yields, the local currency choices offer the potential for better results.

If U.S. bonds sink this year, local currency bonds could also fall. But the emerging markets bonds are unlikely to track U.S. Treasuries exactly. Because Asian and Latin American bonds are influenced by a variety of central banks, local currency issues could follow different paths.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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