ETF Offers Emerging-Market Bond Exposure
By Roger Nusbaum - 03/12/12 - 9:42 AM EDT
Tickers in this article: EMCB
NEW YORK (TheStreet
) -- Last week we looked
at the new PIMCO Total Return Exchange Traded Fund
, which is being offered as an actively managed, core fixed-income holding.
One indexed alternative for a core holding is the iShares Barclays Aggregate Bond Fund
But in addition to core holdings, a diversified portfolio should also include specialized exposure, the kind available from the new WisdomTree Emerging Markets Corporate Bond Fund
EMCB is an actively managed fund, and WisdomTree has outsourced the management to Western Asset Management Company
The fund will charge an expense ratio of 0.60% and will own dollar-denominated bonds.
(WisdomTree has its Emerging Markets Local Debt Fund
for those seeking currency exposure, but ELD owns sovereign debt, while EMCB will own corporate debt.)
The process for the fund's construction and then ongoing management is what is referred to as top-down. Top-down management involves first looking at the big picture, which includes country fundamentals and prospects, then assessing various sectors. Of course, the process includes analysis of the companies and bonds chosen for inclusion.
As of Friday, EMCB appears to not be fully invested yet, as 21% of the fund is in cash. The largest sector exposure currently is oil at 28%, followed by metals at 15% and industrials at 13%.
Currently, financials only make up 2.5% of the fund, which is encouraging. Financial companies issue a lot of bonds, and it is common to see that sector feature very prominently in many index bond funds, but with an actively managed fund the manager can choose to avoid or underweight that, or any, sector.
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I think this fund's low exposure to financials is wise, although, of course, such decisions can change at any time with an actively managed fund.
At the country level, the fund's Brazil exposure is its largest for now at 25%, followed by Russia at 17% and Mexico at 11%. Currently there is exposure to 14 countries in all, including small exposures to Venezuela and Jamaica, but, again, that could change at any time.
Many of the individual companies in the fund will be familiar. They include Petrobras
As this is an actively managed fund there can be no reasonable certainty as to what its yield may be. The fund will target duration of between two and 10 years. Currently, the duration is around six years, so the interest rate taken is not extreme. This could be important as interest rates are relatively low.
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Emerging-market corporate bonds will be a new space to many investors, but the investment world is changing in the sense that many so-called emerging markets have better balance sheets than developed markets. Meanwhile, interest rates in many emerging markets are closer to what most investors think of as normal, while rates in many segments of the U.S. bond market are far below "normal."
The combination of stronger balance sheets and close-to-normal interest rates should make EMCB an attractive choice.
At the time of publication, common shares of VALE were a client holding.
Tickers in this article: EMCB
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