State Street Global Advisors has listed an accumulating share class for its SPDR Bloomberg Barclays Emerging Markets Local Bond UCITS ETF on Deutsche Börse.
SSGA introduces accumulating share class for EM local currency bond ETF
The introduction of an accumulating share class provides investors with the option to automatically re-invest all coupon payments received within the fund.
The fund tracks the Bloomberg Barclays Emerging Markets Local Currency Liquid Government Bond Index, a country-constrained index designed to provide a broad measure of the performance of liquid local currency emerging markets debt.
The index limits individual country exposure to a maximum of 10% and redistributes the excess market value index-wide on a pro-rata basis.
To be included in the index, securities must have an amount outstanding of at least $1 billion.
The largest country exposures are Mexico (10.3%), Brazil (10.3%), South Korea (9.8%), Malaysia (9.8%) and Indonesia (8.1%.) As things stand, Chinese bonds are notably absent from the index. However, Bloomberg, the index provider, has announced its intention to add Chinese RMB-denominated government and policy bank securities to relevant indices in a phased, 20-month period starting April 2019.
The index has approximately a third of its weight in each of the ‘A’ rated and ‘Baa’ rated credit brackets. Ten percent is allocated to bonds rated ‘Aa’ and the rest is in bonds below ‘Baa’.
The ETF may suit investors seeking higher income opportunities as the index’s current yield to maturity is 5.8%. The index’s effective duration is 5.6 years. It is down 5.6% year to date. (All data as of 23 July 2018).
The fund, which launched in May 2011, has since assets under management of $2.8bn and comes with a total expense ratio (TER) of 0.55%.
The new share class trades in euros and is available under the ticker SPFA GY. A distributing share class is available on London Stock Exchange, Deutsche Börse, SIX Swiss Exchange, Borsa Italiana, and Euronext Paris.
According to SSGA, the long-term drivers of emerging market local currency debt have been carry and price appreciation, with currency providing short-term volatility. The real yield differential to global developed market government bonds remains attractive at over 3%.
The market for ETFs offering local currency emerging market bond exposure is relatively uncrowded in Europe.
The largest ETF in the space is the iShares EM Local Govt Bond UCITS ETF (IEML LN) with over $6.1bn in assets under management. It tracks the Bloomberg Barclays Emerging Markets Local Currency Core Government Bond Index and has a TER of 0.50%.
The $450 million PIMCO EM Advantage Local Bond Index Source UCITS ETF (EMLB LN) issues by Invesco is another alternative. This fund tracks the proprietary PIMCO Emerging Markets Advantage Local Currency Bond Index which weights countries by GDP with a maximum country weight of 15% – a strategy which PIMCO believes helps avoid the most indebted countries. The ETF has a slightly higher price tag of 0.60%.