Update: iShares J.P. Morgan $ Emerging Markets Bond UCITS ETF

Dieser ETF setzt auf das Hartwährungssegment von Schwellenländer-Bonds. Das bietet Schutz von der Währungsseite. Fragezeichen hinter der finanziellen Stabilität der Emerging Markets im Zuge der anstehenden Zinserhöungen in den USA. 

Jose Garcia-Zarate 26.06.2015

Rolle im Portfolio 

The iShares JP Morgan USD Emerging Markets Bond UCITS ETF offers investors exposure to the USD-denominated segment of the emerging market (EM) sovereign debt market. Historically, EM government debt was mostly issued in USD or other developed nation currencies to make it more palatable to global investors. Despite the recent growth in issuance of local currency EM bonds, USD-denominated EM bonds retain the lion’s share of the EM sovereign debt market. 

The search for higher yield and capital gains vis-à-vis developed bond markets remains the key selling point of EM government debt. Financial vehicles offering exposure to EM debt are still likely to be rolled out as satellite components of an investment portfolio; a yield-enhancing complement to lower-risk core developed market fixed income building blocks. Additionally, investors have also been attracted to EM debt by virtue of its low correlation to traditional (i.e. developed economies) fixed income investments. 

Europe-based investors considering this ETF should take into account a fair array of risk considerations including: currency, country and duration. 

This is a USD-denominated monthly-dividend-distributing ETF; hence foreign exchange considerations will regularly impact the income stream. 

The ETF does not discriminate between geographical areas, thus making it a good for diversification, but a poor one for investors wanting to target a specific area or country. 

Finally, this ETF has a relatively high modified duration of around 7%. This, interlinked with currency exposure, adds a further layer of performance risk ultimately dependent on US monetary policy moves.

Fundamentale Analyse 

Emerging markets (EM) are routinely described as one of the main financial markets success stories of the last two decades. Structural changes to the way these economies are governed have facilitated large capital inflows, in turn leading to a significant shift in international investors’ asset allocation trends. EM exposure is now part and parcel of most investment portfolios, with investors lured by comparatively higher yields.

USD-denominated EM government bonds have found support on the back of USD strengthening. However, macro risks do remain in place, as EM economic growth continues to slow. Besides geopolitics and internal social dynamics, a number of emerging market economies (e.g. Russia, Brazil) are being negatively affected by the collapse in commodities prices, particularly oil. Adding to these worries, EM bond valuations may be negatively affected by the eventual normalisation of US monetary policy.

In a way, the global economic crisis exposed one of the key weakness of the rationale for investing in EM. The success of a fair number of these economies was predicated on an export-oriented model whereby they became the suppliers of choice to consumption-driven developed partners. As the latter struggled, EM economies looked to incentivise internal sources of growth. In many cases, their efforts have fallen short of expectations. The end result has been a significant slowdown in economic growth. All the while, the energy revolution in places such as the USA has placed non-diversified oil-exporting EM economies in a perilous position.

Going forward, any move by EM economies to address the economic slowdown by boosting domestic demand via higher government expenditure could weigh on EM government bond valuations. As a whole, EM bonds may remain an interesting asset class. However, investors need to discriminate against the group of more resilient countries within the group, which tend to be characterised by sizeable current account surpluses and foreign reserves.

Despite the growing importance of local currency-denominated EM bond markets, a significant share of EM government bond issuance is still conducted in USD. As such, investors need to consider the impact that US monetary policy decisions may have on performance. As we write (mid June 2015) the focus is on whether the US Fed may start to hike interest rates before year-end or would instead wait until early 2016. US policy normalisation would be USD-supportive, but would make it more expensive for EM economies to attract foreign capital inflows.

Indexkonstruktion

The JP Morgan EMBI Global Core Index is a subset of the broader JP Morgan EMBI Global Index and measures the performance of most liquid USD-denominated emerging market sovereign or quasi-sovereign bonds. The EMBI Global Core Index includes fixed, floating rate and capitalising bonds with a minimum outstanding of USD 1bn and minimum remaining maturity of 2.5 years. Eligible countries are those classed by the World Bank as having low or medium per capita income for two consecutive years, or countries that have restructured their external debt over the last decade. The index is calculated every business day of the year, as defined by the US bond market calendar. Valuations are calculated on best offer/bid prices submitted by a selected group of emerging market brokers or JP Morgan traders if prices from selected brokers are not available. This is a diversified index which limits the weights of countries with higher debt outstanding. The index is rebalanced on the last business day of each month. Income arising from coupon payments is reinvested in the index on the date paid.

Fondskonstruktion

iShares uses physical replication to track the performance of the JP Morgan EMBI Global Core Index. Given the large number of index constituents, iShares uses stratified sampling to construct the fund. The index is broken down into sections, each representing key risk factors (e.g. duration, currency, country, rating). The managers then choose bonds that mimic the risk profile of each section. The aggregate result is a portfolio that represents the index’s overall risk profile, while allowing the ETF manager to avoid purchasing bonds that may suffer from illiquidity. This ETF distributes dividends on a monthly basis. As we write (mid June 2015) the number of fund constituents was 296, with Turkey, Philippines, Mexico, Russia, Colombia and Hungary as the top six issuers in value terms (30-35% of the fund’s basket). The fund’s modified duration is in the 7-8 year range, in keeping with the benchmark. iShares engages in securities lending in order to optimise the ETF’s tracking performance. BlackRock acts as investment manager on behalf of iShares. The amount of securities that can be lent out is capped to 50% per fund. The annual average on loan for this ETF in the year to end March 2015 was 13.9% for an average return of 4bps. Lending operations are hedged by taking UCITS-approved collateral greater than the loan value and by revaluing loans and collateral on a daily basis. The collateral is held in a ringfenced account by a third party custodian. The degree of overcollateralisation is a function of the assets provided as collateral, but typically ranges from 102.5% to 112%. Lending revenue is split 62.5/38.5 between the ETF and BlackRock, respectively.

Gebühren

The total annual expense ratio (TER) for this ETF is 0.45%. This sits mid-way in the 0.30-0.55% TER range for ETFs providing exposure to the USD-denominated segment of the EM government debt market. Additional costs potentially borne by investors and not included in the TER include bid/offer spreads and brokerage fees when buy/sell orders are placed for ETF shares. There are also rebalancing costs whenever the index changes composition.

Alternativen 

The iShares JP Morgan USD EM Bond ETF is European market leader in this particular segment, as measured by AUM. 

Alternatives include the db x-trackers II EM Liquid EuroBond ETF (synthetic; TER 0.55%) and the EUR-hedged version of the iShares JP Morgan USD EM Bond ETF (physical; TER 0.50%). Returns for both these ETFs are hedged in EUR, which may be seen as an advantage for Eurozone investors unwilling or unable to deal with FX considerations. 

Another alternative is the Amundi Global Emerging Bond Markit iBoxx ETF, a USD-denominated fund charging a TER of 0.30%. Despite a more competitive TER, its AUM are a fraction of those held by the iShares ETF. 

Investors also have access to ETFs providing exposure to local currency EM government debt, which tends to be issued mostly in short-to-medium maturities. The SPDR Barclays Capital EM Local Bond ETF (TER 0.55%), the iShares Barclays Capital EM Local Government Bond (TER 0.50%) and the PIMCO Source Advantage Local Bond ETF (TER 0.60%) offer this exposure. They all are physically replicated

Über den Autor

Jose Garcia-Zarate  is an ETF analyst with Morningstar UK.