VanEck launches emerging markets local currency bond ETF in Europe

Apr 21st, 2017 | By | Category: Fixed Income

VanEck has launched the VanEck Vectors JP Morgan EM Local Currency Bond UCITS ETF (EMLC) on the London Stock Exchange, offering exposure to bonds issued in local currencies by emerging market governments.

Uwe Eberle, head of international business development and distribution at VanEck

Uwe Eberle, head of international business development and distribution at VanEck.

Uwe Eberle, head of international business development and distribution at VanEck, commented: “EMLC allows investors to participate in local emerging markets economies which historically have had higher yields than developed markets, and have the potential for currency appreciation. Additionally, local currency emerging markets bonds tend to have a lower correlation to the US dollar and thus provide a great way to diversify a portfolio.”

The fund tracks the JP Morgan GBI-EMG Core Index, a reference for the performance of bonds issued in local currencies by 16 emerging market governments: Argentina, Brazil, Chile, Colombia, Hungary, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, Romania, Russia, Thailand, Turkey, and South Africa. The fund trades in US dollars.

The index is market-cap weighted and rebalanced monthly, with individual country exposure capped at 10% to enhance diversification. A country floor of 3% is also applied.

There are over 200 holdings in the index; the ETF itself holds 80 securities as it pursues a sampled replication approach to index tracking. Bonds from Brazil, Poland, Indonesia and Mexico each make up approximately the maximum allowable weighting of 10% in the ETF, while South Africa (9.1%), Turkey (7.0%) and Colombia (6.8%) make up the next largest country exposures. Investors may be surprised to learn that the majority of the ETF’s holdings are of investment grade quality (55.6%), composed of bonds rated ‘A’ (23.5%) and ‘BBB’ (32.1%). Bonds rated ‘BB’ make up 16.6% while a portion of unrated bonds accounts for 17.9%.

The ETF may suit investors seeking higher income opportunities as the index’s current yield to maturity is 6.4%. The index’s effective duration is 5.0 years and is up 6.4% year to date. (All data as of 20 April 2017).

The fund has a total expense ratio (TER) of 0.47%.

It is the fourth UCITS ETF offered under the VanEck Vectors brand. The firm has announced its intention to roll the fund out on further European stock exchanges in the near future.

“After introducing our UCITS ETFs in 2015 with two gold mining equity ETFs and MOAT, a strategic beta ETF, we are pleased to add EMLC to our line-up in Europe,” said Eberle. “Investor interest in emerging markets has been on the rise as we see the potential for higher economic growth than in developed markets and substantial EM local real rates. EMLC reflects our commitment to offering forward-looking investment solutions that strengthen a long-term portfolio.”

VanEck will be hoping the fund replicates the success of its US-listed counterpart – the VanEck Vectors JP Morgan EM Local Currency Bond ETF (NYSE: EMLC) launched in July 2010 and has grown its assets under management to over $3.3bn.

While the market of ETFs covering local currency emerging market bond exposures is relatively uncrowded in Europe, EMLC will still be competing with existing products from iShares and PIMCO.

By far the largest of the two is the iShares EM Local Govt Bond UCITS ETF (LON: IEML) with just over $5 billion 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 $180 million PIMCO EM Advantage Local Bond Index Source UCITS ETF (LON: EMAD) provides an alternative solution for investors. The fund tracks the in-house 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%.

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