Exchange-traded fund provider VanEck has launched the VanEck Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (NYSE Arca: IGEM), a new ETF designed to give investors exposure to investment grade US dollar-denominated sovereign emerging markets bonds.
Fran Rodilosso, Portfolio Manager for Fixed Income ETFs with VanEck
The fund tracks the JP Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index.
With global bond yields reaching new lows, and a growing number of government bonds turning into negative yields, investors may increasingly favour higher yielding asset classes to add income to their portfolios.
Fran Rodilosso, Portfolio Manager for Fixed Income ETFs with VanEck, said in a statement: “For investors seeking income, US dollar-denominated emerging markets investment grade sovereign bonds have historically proven attractive, delivering a yield premium of 49 basis points over US dollar-denominated corporate investment grade bonds, and 220 basis points over 10-year US Treasuries over the last five years.
The incremental yield achieved through emerging markets bonds do come with additional risks associated with these investments, such as credit or currency risk. The ETF attempts to strike the right balance with the trade-off between yield and risk by investing primarily in bonds with investment grade status – those bonds with a middle rating of at least BBB- or above from the three main ratings agencies, Standard & Poor’s, Moody’s and Fitch.
A minimum of 80% of the portfolio is generally invested in investment grade rated bonds, but it can also include up to 20% in BB-rated bonds, while avoiding countries rated single-B and below. Furthermore, the denomination of these bonds in dollars allows US-based investors to limit exposure to emerging markets local currency volatility.
“By focusing on the higher rated subset of the market, IGEM can potentially provide yield enhancement, without adding a significant amount of credit or currency risk, to income-oriented investors’ portfolios,” noted Rodilosso.
As of 15 July 2016 the fund has significant country exposure to Mexico (8.9%), Turkey (6.7%), the Philippines (6.7%), Indonesia (6.7%) and Colombia (5.8%).
The ETF has a gross expense ratio of 0.45% and a net expense ratio of 0.40%, which is capped contractually until September 2017.
The fund joins VanEck’s suite of emerging markets bond ETFs, which includes:
VanEck Vectors JP Morgan EM Local Currency Bond ETF (NYSE Arca: EMLC)
VanEck Vectors Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM)
VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAG)