Fundamentals Could Lift This EM Bond ETF

ELD’s credit profile indicates investors are not taking on significantly higher credit risk with this ETF. About 61 percent of the ETF’s holdings are rated A and BBB. Another 16.2 percent are rated either AAA or AA. Additionally, ELD offers ample exposure to developing markets that could soon be on the receiving end of higher credit ratings.

For example, ELD has a 3.72 percent weight to the Philippines, which was recently promoted to investment-grade status. Last month, Standard & Poor’s said it could boost Peru’s credit rating, according to the Wall Street Journal. The Andean nation represents 3.43 percent of ELD’s weight.

Indonesia, Turkey and Colombia are all credible candidates for higher credit ratings and those countries combine for over 20 percent of ELD’s weight. Indonesia is the ETF’s third-largest country allocation at 10.33 percent.

Again, sometimes what countries are excluded in an emerging markets bond ETF are just as important those that are include. Hungary proves the point.

“Currently, Hungary is rated BB (two notches below investment grade) by S&P, on par with borrowers such as Portugal and Guatemala,” said Harper in the note. “S&P notes that the government’s predictability and credibility has continued to weaken in the past year. Questions about central bank independence, a large percentage of debt held by foreign investors, and a banking system with large foreign liabilities pose significant risks, in our opinion.”

ELD has a 30-day SEC yield of 3.91 percent and an effective duration of 4.87 years. The average yield to maturity on the ETF is 4.57 percent. ELD, which has an expense ratio of 0.55 percent, now has $1.9 billion in assets under management, up from $1.6 billion in early January.

This article was originally written by The ETF Professor, and posted on Benzinga.