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Update: Barclays Emerging Markets Local Bond UCITS ETF

Barclays folgt bei der Berechnung des Index der Schwellenländer-Klassifikation der Weltbank und des IWF. State Street wendet das optimierte Sampling-Verfahren an, um diesen breit diversifizierten Index abzubilden. Viele Schwellenänder-Währungen haben 2015 ein tiefes Tal durchschritten.

Jose Garcia-Zarate 18.03.2016

Rolle im Portfolio

SPDR Barclays Emerging Markets Local Bond UCITS ETF offers exposure to the market of local-currency-denominated emerging-markets government debt. It tracks a geographically diversified global index that covers the most-liquid emerging-markets bond issuers. This ETF uses the US dollar as its base currency, but it does not hedge its exposure to emerging-markets local currencies, meaning that investors will take a bet on emerging-markets currencies. The ETF distributes dividends on a semiannual basis.

The search for higher yield vis-a-vis developed bond markets is the key selling point of emerging-markets government debt. Investors are also attracted to emerging-markets debt by virtue of its low correlation with traditional developed fixed-income investments. In addition, investors in local-currency emerging-markets debt also seek potential gains via favourable foreign-exchange differentials; although this can also work the other way around. This ETF is likely to work best as a satellite component in most investment portfolios.

Increasingly, investors are being advised not to treat emerging markets as a homogeneous asset class and instead discriminate between countries. On paper, this would seem to support an active approach to the asset class, not least considering the added exposure to currency risk from multiple countries. However, compared with its Morningstar Category, which includes actively managed funds, this ETF has outperformed the bulk of its peers during the past three years, with its risk-adjusted returns ranked in the upper area of the first quartile.

The fact remains that active bets on emerging-markets debt are fraught with risks and volatility, whereas a geographical broad-based and low-cost passive approach helps to balance these out. Ultimately, this could translate into comparatively more stable and less risky long-term cumulative returns for passive funds.

This SPDR ETF displays a patchy tracking record. This has not proved to be a shortcoming in order to outperform its category peers, but it should be addressed by the fund's management team. Its ongoing charge of 0.55% is average for this passive exposure but is competitive in the wider context of its category.

All factors considered, this SPDR ETF stands as an interesting proposition to gain exposure to this market. Having said that, it has only been in the marketplace since mid-2011 and so we need to see how its performance stacks up in a longer period. 

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Fundamentale Analyse

Emerging markets are routinely highlighted as one of the main economic success stories of the past three decades. Structural changes to the way these economies are governed have made emerging-markets bond exposure part and parcel of most investment portfolios, with investors lured by higher yields relative to developed counterparts.

Historically, emerging-markets government debt was mostly issued in US dollars in order to make it palatable to global investors. However, changes in attitudes toward emerging-markets countries have allowed for the rapid growth of local-currency emerging-markets debt markets. Issuance in local currency helps emerging-markets governments to avoid currency mismatches in their domestic budgets.

The attractive yield differential is still a powerful driver of demand. However, for the past three years, macro risks have been weighing on emerging-markets bond valuations, while exerting downside pressure on their currencies relative to the US dollar.

Overall emerging-markets economic growth has slowed down, with some countries (for example, Russia and Brazil) severely hit by the collapse in commodities prices. In addition, emerging-markets bond valuations have also been negatively impacted by expectations of US monetary policy normalisation. In general terms, the more resilient emerging-markets countries are those with diversified economies, current account surpluses, and sizable foreign-exchange reserves.

It is fair to say that the rationale for investing in emerging markets is now being reformulated. The past economic success of most emerging-markets economies rested on an export-oriented model. In the post-2008 environment, with demand from developed countries on the wane, emerging-markets economies with a sufficiently diversified structure--that is, those producing more than just commodities--have switched focus to domestic sources of growth.

The transition to a new economic model is difficult and likely to take many years. This explains the comparatively lower expected growth rates going forward. Moves by emerging-markets economies to boost domestic demand may translate into higher government expenditure, which would weigh on emerging-markets government-bond valuations.

Irrespective of whether emerging-markets bond issuance in conducted in US dollars or local currency, investors need to keep a close eye on developments in the foreign-exchange market. Overall, the combination of slower emerging-markets economic growth and the policy normalisation undertaken by the US Federal Reserve are supportive of the US dollar.

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The Barclays Emerging Markets Local Currency Liquid Government Bond Index measures the performance of fixed-rate local-currency-denominated government bonds issued by emerging-markets countries with the most-liquid markets. These are defined as having a minimum total market size in local currency equivalent to at least USD 5 billion. The index includes both investment-grade and non-investment-grade issuers. Barclays uses a fixed list of emerging-markets countries that is reviewed annually. Eligible countries include those defined as emerging markets by the IMF or the World Bank. In addition, the list includes countries that, although not officially classified as emerging markets, they are seen that way by investors because of factors such as investability concerns, the presence of capital controls, and/or geographic considerations. Eligible bonds must have a minimum remaining maturity of one year and a minimum outstanding in local currency that varies depending on the issuing country. Bonds are priced on the bid side using a variety of sources, including Barclays market makers and third-party vendors and local providers. The index is weighted by market capitalisation, subject to an issuer cap of 10%. Any excess value is distributed on a pro-rata basis to the remaining countries making up the index. The index is rebalanced on a monthly basis. Intramonth coupon income is held as cash and reinvested at rebalancing.

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SPDR uses physical replication to track the performance of the Barclays Emerging Markets Local Currency Liquid Government Index. SPDR uses stratified sampling to construct the fund. The index is broken down into sections, each representing key risk factors, such as duration, currency, country, rating, and sector. The managers then choose bonds included in the index 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 suffer from illiquidity. According to our research, the extent of sampling for this ETF has tended to be limited. This ETF distributes dividends on a semiannual basis, with historical data showing a February-August payment pattern. The fund does not currently engage in securities lending.

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The annual ongoing charge for this ETF is 0.55%. This is the midpoint of the 0.50%-0.60% range for ETFs offering exposure to the local-currency emerging-markets government-bond market. Additional costs potentially borne by investors and not included in the ongoing charge 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.

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There are several ETFs providing exposure to local-currency-denominated emerging-markets bonds. However, they all track different benchmarks, and this results in varying levels of coverage of the underlying market.

The most popular alternative to this SPDR ETF, in terms of assets under management, is the iShares Emerging Markets Local Government Bond UCITS ETF (physical; ongoing charge 0.50%). It tracks the core subset of the Barclays EM local-currency government benchmark. This core index measures the performance of the 15 emerging-markets issuers considered as having the most accessible local-currency government-bond markets. Relative to the liquid index tracked by SPDR, the core index is more restricted in terms of country coverage and applies lower minimum outstanding requirements for individual bonds.

Investors can also consider ETFs that track fundamentally weighted benchmarks. PIMCO Emerging Markets Advantage Local Currency Bond Source ETF (physical; 0.60%) and ETFS Lombard Odier IM Emerging Market Local Government Bond Fundamental ETF (physical; 0.57%) track indexes that apply macro filters in a bid to overweight the emerging-markets countries deemed to be best placed to pay back their debts. In addition, by means of nondeliverable currency forwards, these ETFs offer exposure to China and India, which are not part of the standard emerging-markets local-currency indexes.

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Über den Autor

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