A New ETF With Good Timing

Some new exchange-traded funds struggle with poor timing. It is not that the ETF's underlying concept is poor, it is that some rookie ETFs debut at a time when the asset class or investment niche followed by the fund is out of favor.

Although enthusiasm should be restrained for ETFs that are just a week old, it is accurate to say that the VanEck Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (iShares Inc. IGEM) is one of 2016's better-timed new ETFs. The new ETF, VanEck's fifth emerging markets bond fund, debuted at a time when investors are enthusiastic about emerging markets bonds.

IGEMIn The Spotlight

The new ETF tracks the J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index (JPEGIGBB), “which is comprised primarily of investment grade U.S. dollar-denominated bonds issued by emerging markets (EM) governments,” according to VanEck.

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As a dollar-denominated ETF, the IGEM limits investors' exposure to volatile emerging markets currencies. IGEM has other advantages, particularly at a time of dollar weakness and still low U.S. interest rates.

Emerging markets debt and the corresponding ETFs have been embraced by investors this year as the amount negative-yielding debt in the world increases by the trillions.

“As unpredictable as the Brexit decision was, the fact that the resulting selloff in risk markets reversed so quickly, yet rates continued to fall, was equally difficult to forecast. The net result has been that by early July, some $11.5 trillion in bonds were trading at negative rates, with 58 percent of the Barclays US Aggregate Bond Index trading below 1 percent. Thus, the hunt for yield continued as aggressively as ever,” said VanEck in a recent note.

IGEM, which holds almost 60 bonds, has an effective duration of nearly eight years and a yield-to-worst of 3.49 percent.

As is the case with rival ETFs, IGEM could prove sensitive to Federal Reserve monetary policy. For the moment, that is alright.

Emerging Markets Factor

Emerging markets governments and some corporations binge borrowed in dollars during the various versions of the Fed's quantitative easing programs. It looked smart, as the dollar weakened against a plethora of developed and emerging currencies, but those emerging markets borrowers were caught off guard when the dollar started soaring several years ago.

“Under current conditions, we expect to see an acceleration of inflows during the second half of the year. Valuations, positive real rates of interest, and EM central banks with (conventional) policy flexibility are all supportive of the case for EM. The risks are many, including further growth deceleration and a reversal in the commodity price recovery. On the flip side, a rate shock, as unlikely as it may seem at the moment, could cause a sharp reversal in flows to various debt asset classes, including EM,” added VanEck.

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