Update: SPDR® Barclays Emerging Markets Local Bond UCITS ETF

Dieser ETF setzt auf lokale Währungen und bildet den Barclays Emerging Markets Local Currency Liquid Government Index ab. Dass er einen Gross-Index abbildet, lässt den ETF zu unrecht relativ schlecht aussehen.

Jose Garcia-Zarate 09.09.2016

Rolle im Portfolio

SPDR Barclays Emerging Markets Local Bond UCITS ETF offers exposure to the market of local-currency-denominated emerging-markets government debt. This exchange-traded fund tracks a geographically diversified index that covers the most-liquid issuers. It uses the US dollar as its base currency but does not hedge its exposure. The fund distributes dividends on a semiannual basis. It 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 both active and passive funds, this ETF has consistently outperformed its peers during the past three and five trailing years, with 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 may balance these out. Ultimately, this may lead to a more-stable and less-risky returns for passive funds.

At first sight, this SPDR ETF displays a patchy tracking record. However, this is because it tracks a gross total return index that does not factor in tax payments.

The ETF’s ongoing charge of 0.55% is average for this passive exposure and very competitive in the wider context of its category.

All factors considered, this ETF stands as a compelling proposition to gain exposure to this market. 

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, changing attitudes have allowed for the rapid growth of local-currency emerging-markets debt markets. Issuance in local currency helps governments avoid currency mismatches in their domestic budgets.

The attractive yield differential remains a powerful driver of demand for emerging-markets bonds. In addition, investors in local currency may also benefit from a boost in returns at times of favourable foreign exchange dynamics--that is, whenever emerging-markets currencies appreciate.

Although diminished, country risks have not disappeared from emerging-markets investing. 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 should be negatively affected by any further normalisation (that is, increases in interest rates) of US monetary policy.

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 that have 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. In addition, moves by these economies to boost domestic demand may lead to higher government expenditures, which would weigh on emerging-markets government-bond valuations.

Irrespective of whether bond issuance is conducted in US dollars or local currency, investors in emerging markets 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.

Indexkonstruktion

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 market size in local currency equivalent to USD 5 billion. The index includes both investment-grade and non-investment-grade issuers. The index that SPDR tracks is the gross total return version, which does not factor in tax payments. Barclays uses a list of emerging-markets countries that is reviewed annually. Eligible countries include those defined as emerging markets by the IMF or the World Bank. The list also includes countries that, although not officially classified as emerging markets, are seen that way by investors because of 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 equivalent to at least USD 1 billion. Bonds are priced on the bid side using a variety of sources. The index is weighted by market cap, 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.

Fondskonstruktion

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.

Gebühren

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.

Alternativen

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 iShares Emerging Markets Local Government Bond UCITS ETF (physical; ongoing charge 0.50%). It tracks the “core” subset of the Barclays emerging-markets 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. Originally, the “core” index was more restrictive in terms of country coverage, but through the years we have seen it evolve towards the “liquid” version tracked by SPDR.

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 give overweightings to the emerging-markets countries deemed 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.

Über den Autor

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