If your clients are fans of the newish investment theme of local currencies in emerging markets, your job just got slightly easier. Why? Because now there is an ETF that tracks this, of course.
Van Eck Global, the asset manager known for its specialty in natural resources and hard assets, has launched an ETF that provides investors a chance to buy bonds issued in local currencies of emerging markets.
The Market Vectors Emerging Markets Local Currency Bond ETF [EMLC] tracks an index from JPMorganChase [JPM] that’s made up of bonds issued in the local currencies by 13 countries spread over four continents. Specifically, those countries are: Brazil, Colombia, Egypt, Hungary, Indonesia, Malaysia, Mexico, Peru, Poland, Russia, South Africa, Thailand, and Turkey. To add an extra level of diversification, no one country is allowed to make up more than 10% of the index.
Adam Phillips, Van Eck’s Managing Director of ETFs, said that a quick look at fund flows illustrates how popular investments in local currency investments are becoming. They account for more than 70% of new money being invested in all emerging market mutual funds, he says. The general idea, of course, is to ride the wave of currency appreciation in those countries. And now, with this ETF, which Van Eck says is the first ETF that specifically targets this area, investors have a cheaper option.
To be sure, Lipper could not find any other ETFs like this, but there are some mutual funds that offer this same exposure. Examples include Dreyfus Emerging Markets Debt Local Currency [DDBAX], Eaton Vance Emerging Markets Local Income [EEIAX], and PIMCO Emerging Local Bond Fund [PEBLX].
Ed Lopez, director of marketing at Van Eck, noted that 70% of the new ETF is from investment-grade countries. So once an investor gets comfortable with the currency risk, this type of investment can be a good way to get a relatively safe exposure to a growing asset class.
In the past, many of the emerging markets have had their share of problems, notably with fiscal responsibility. But over the past 10 years, many have re-tooled to the point that they now have stronger balance sheets than many developed nations, he says.
The stimulus packages that many development governments passed over the past two years have left them with massive levels of debt.
Indeed, emerging markets economies’ debt-to-GDP ratio average about 40%, while the developed nations are shouldering a much higher relative debt load, in the 80% to 120% range. This issue of whether to invest in emerging markets bonds via local currencies versus dollar-denominated bonds is explored in greater detail in a feature story in the upcoming August issue of On Wall Street, now available online.
Van Eck Global has about $22 billion in assets under management in its full array of mutual funds, insurance funds and ETFs.