Changes Benefit This EM Bond ETF

Emerging markets fixed income exchange-traded funds have been a popular destination for income-starved investors and that is true of those funds that hold bonds denominated in local currencies. With the dollar slumping against an array of developing world currencies, ETFs such as the VanEck Vectors J.P. Morgan EM Local Currency Bond ETF EMLC are benefiting.

Not only does EMLC tempt with a 30-day SEC yield of 5.64 percent, but the ETF is more than a yield play as highlighted by a year-to-date return of almost 11 percent. EMLC, which debuted more than seven years ago, tracks the J.P. Morgan GBI-EMG Core Index. The ETF holds 265 bonds, a testament to the rapid growth of the emerging markets fixed income space in recent years.

EMLC features exposure to 20 countries, many of which are large, predictable developing markets, but recent changes to emerging markets bond indexes, are benefiting funds like EMLC.

New Additions

“The emerging markets local debt universe has grown tremendously over the past several years,” said VanEck in a recent note. “Within the last five years, the investable universe has grown 37 percent to $1.2 trillion versus approximately $900 billion of U.S. dollar-denominated sovereign debt. Investors today benefit from a more diverse opportunity set with greater market depth, in addition to the attractive yields offered by the asset class.”

Brazil, Mexico and Poland combine for over 28 percent of EMLC's weight, but the ETF's underlying index has recently made room for new countries with potentially lucrative fixed income opportunities for investors.

“This year alone, three new countries, Argentina, Czech Republic, and Uruguay, have been added to the J.P. Morgan GBI-EM Global Core Index,” said VanEck. “Romania was added in 2013.”

Argentina, Czech Republic, and Uruguay combine for almost 8 percent of EMLC's weight. Romanian bonds represent nearly 3 percent of the fund's weight.

Minimal Increased Credit Risk

Currently, over 56 percent of EMLC's holdings are rated A or BBB with another 17.5 percent rated BB, indicating the ETF's credit risk profile has not increased in alarming fashion following the addition of countries such as Argentina, Czech Republic and Uruguay.

“Overall the Index has shifted exposure towards Latin America and European emerging markets and away from Asia and Middle East/Africa. Compared with five years ago, credit quality is unchanged to one notch lower, depending on the rating agency scale used,” according to VanEck.

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