This Local Debt ETF Is an Economic Growth Play

By Benzinga.com  JAN 09, 2013 2:12 PM

One of the 2012's most prominent ETF themes -- emerging markets local currency bond ETFs -- has the potential to keep thriving in 2013.

 


Editor's Note: This content was originally published on Benzinga.com by The ETF Professor.

Amid lingering concerns about slowing global economic growth, one of the 2012's most prominent ETF themes has the potential to keep thriving in 2013. That theme being the soaring popularity of emerging markets local currency bond ETFs.

ETFs such as the Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA:EMLC), iShares Emerging Markets Local Currency Bond Fund (NYSEARCA:LEMB), and the actively managed WisdomTree Emerging Markets Local Debt Fund (NYSEARCA:ELD) were home to impressive gains in assets under management last year as investors sought out the stronger currencies and government balance sheets offered by some developing markets.

Those funds are diverse at the country and region levels. For example, ELD, which has over $1.6 billion in AUM making it the second-largest actively managed ETF on the market today, spreads its country allocations between Asia, Africa, Europe, Latin America and the Middle East. In 2013, some investors may want to consider a more focused bet on bonds issued in local emerging markets currencies.

"As investors adjust their portfolios to account for potentially lower levels of output growth in 2013, many might consider a greater allocation to countries that, as a region, are currently growing at the fastest pace globally," said WisdomTree Portfolio Manager Rick Harper in a research note.

Harper continued: "After a year that has seen modest regional currency underperformance compared to Emerging Europe and Latin America due to concerns about a prolonged slowdown in China, 2013 could provide a positive backdrop for Asian outperformance as investors shrug off earlier economic concerns. When focusing on fundamentals, we believe the prospects for Asia are indeed some of the brightest across the developed as well as the emerging markets."

Investors can easily tap into the theme of strong Asian currencies through the WisdomTree Asia Local Debt Fund (NYSEARCA:ALD). ALD, which will celebrate its second birthday in March, is home to $458 million in AUM. That makes it one of the largest actively managed ETFs.

Importantly, ALD has gained about 7.3% in the past year and the fund pays a monthly dividend, adding to its allure for income investors looking for some non-dollar or international exposure.

More importantly are the facts that ALD's constituent currencies are arguably undervalued and carry higher interest rates than what can be found in much of the developed world.

"Currently, interest rates are approximately three times higher in Asia than in many developed markets (providing a distinct carry advantage)," said Harper. "While higher interest rates have attracted some investors, these countries' projected growth rates lead many economists to call for continued appreciation of their currencies against the US dollar. On average, currencies in ALD are undervalued compared to their long-term purchasing power by 18%."

With expectations firmly in place for the Federal Reserve, the Bank of Japan and other developed market central banks to continue engaging currency-depressing easing programs, higher-yielding Asian currencies become all the more attractive.

Regarding ALD, the ETF is not as risky either at the credit level or the country level as some investors may think. With Singapore, Australia and New Zealand combing for almost 28% of ALD's weight, the fund offers significant developed markets exposure. At the credit level, roughly two-thirds of the fund's holdings are rated AAA, AA or A.

Other country weights include South Korea, Thailand, Malaysia, Indonesia, the Philippines, China, Taiwan and Hong Kong.



Airline Stocks Soar While Boeing Remains Grounded

Several Retail Names Look Vulnerable

Redbox Instant Beta Launches With Glitches, Lackluster Selection

Twitter:
@Benzinga

Benzinga Pro covers this and all market news in real time. Get your free trial here.

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.