Horizons launches Canada’s first actively managed EM bond ETF

Aug 3rd, 2018 | By | Category: Fixed Income

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Horizons ETFs has unveiled Canada’s first actively managed emerging markets bond ETF: the Horizons Active Emerging Markets Bond ETF (HEMB CN) on Toronto Stock Exchange.

Horizons launches Canada's first active emerging markets bond ETF

Steve Hawkins, president and Co-CEO of Horizons ETFs.

Sub-advised by both Fiera Capital and Mirae Asset Global Investments, the fund will invest in fixed rate and floating rate instruments issued by sovereign, quasi-sovereign, supranational, and corporate issuers.

US dollar currency exposure is hedged back to Canadian dollars.

“With the constantly evolving conditions within emerging bond markets, we believe active management is the only way to go for this sector,” said Steve Hawkins, president and co-CEO of Horizons ETFs.

He added: “It’s exciting to offer this product – Fiera Capital and Mirae Asset are both globally recognized for their expertise in global bond investing. We’re confident their combined efforts will result in a superior way for Canadian investors to access emerging market bonds.”

Fiera Capital oversees global asset allocation and the selection of sovereign bonds. The target mix of sovereign and quasi-sovereign bonds in the HEMB portfolio is initially approximately 80%.

“Emerging market bonds have become a popular choice among investors as of late, and for good reason. In previous months, we’ve seen strong regional performance amidst a robust global market,” said François Bourdon, global CIO at Fiera Capital. “Through HEMB, investors gain exposure to those regions and governments that are well on their way to a more stable credit environment.”

Mirae Asset’s investment management team oversees the selection of corporate bonds in the portfolio, which will make up approximately 20% of the allocation. Horizons notes the allocation to corporate bonds allow HEMB to generate a higher yield than the broader emerging market bond universe.

“Recent positive global market trends have boosted the credit worthiness of many corporations within emerging markets, making them attractive investments, that under different conditions, might otherwise go overlooked,” said Joon Hyuk Heo, Mirae Asset’s head of global fixed income investments in New York. “Our corporate debt strategy will target the most attractive securities given the market conditions and sound fundamentals.”

The fund comes with a management expense ratio (MER) of 0.55%.

The fund will compete with a number of similarly priced, passive alternatives, including funds from BMO and BlackRock.

The BMO Emerging Markets Bond Hedged to CAD Index ETF (ZEF CN) tracks the Barclays Emerging Markets Tradable External Debt (EMTED) GDP Weighted Capped Index. The smart beta index follows the performance of a diversified basket of US dollar-denominated sovereign debt from emerging market issuers while weighting the country exposure according to GDP. To be eligible for inclusion in the index, securities must have a remaining term to maturity between 18 months and ten years. ZEF has assets under management of CAD250 million and comes with a MER of 0.56%.

The iShares JP Morgan USD Emerging Markets Bond Index ETF (XEB CN) is a little cheaper with a MER of 0.53 and has approximately $110m in AUM. It tracks the JP Morgan EMBI Global Core Hedged in CAD Index which provides exposure to US dollar-denominated sovereign bonds from over 30 emerging market countries. Constituents are weighted by market value outstanding.

Both funds hedge their currency exposure back to the Canadian dollar.

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