When it comes to emerging markets ETFs, knowing what countries are left out of or only have minimal exposure in a particular fund is often as important as knowing what nations dominate that ETF.
At the equity level, ETFs with sizable weightings to the largest emerging markets have disappointed investors this year.
On the other hand, Indonesia and the Philippines, among others, have been sturdy performers while BRIC, South Africa and South Korea have wilted. Investors should apply a similar logic when it comes to bond ETFs because some funds indicate that what countries are excluded can be nearly as important as those that included.
That is the case with the WisdomTree Trust (NYSEARCA:ELD). The WisdomTree Emerging Markets Local Debt Fund is the second-largest actively managed ETF on the market today and was the first to cross the much ballyhooed $1 billion in assets under management mark.
Few in the mainstream financial media either know that ELD is actively managed or that it is big because the powers that be opt to focus on just one actively managed ETF.
Since its debut in August 2010, ELD has returned just over 17 percent, a stout number and one that indicates active management is working here. Consider the case of Hungary. The volatile Eastern European nation accounts for nearly five percent of ELD’s benchmark index, but the ETF makes no room for the financially troubled nation.
“Recently, the ratings agency Standard & Poor’s announced that it was joining Moody’s in lowering the outlook for Hungary’s sovereign credit rating,” said WisdomTree portfolio manager Rick Harper in a new research note. “ELD’s portfolio management team has excluded Hungary from the portfolio ever since the Fund’s inception for many of the same reasons discussed in the S&P report. Principally, we are concerned about the uncertainty of future action by government policy makers. After a breakdown in negotiations with the International Monetary Fund (IMF) disappointed markets last year, we remain skeptical about the path of governmental reform we believe is required to help improve Hungary’s economy.”