Exchange-traded fund provider Invesco PowerShares Capital Management has launched the PowerShares Fundamental Emerging Markets Local Debt Portfolio (PFEM) on the NYSE Arca.
PFEM is designed to provide investors fundamentals-weighted exposure to emerging market sovereign debt denominated in local currencies. The fund has an expense ratio of 0.50 per cent and is expected to issue monthly distributions.
“Emerging market sovereign debt represents an attractive asset class potentially offering investors higher yields and lower debt to GDP ratios relative to most developed markets,” says Andrew Schlossberg, head of US distribution and global ETFs. “Consistent with our leadership position in providing a value-added approach, the PowerShares Fundamental Emerging Markets Local Debt Portfolio (PFEM) is the first ETF to provide investors a fundamentals-weighted exposure to emerging market sovereign debt denominated in local currencies.”
Traditional bond indexes generally use some form of market-cap weighting where constituent weights are a function of both the amount of debt issued and the debt’s current price. This approach can result in greater weights being assigned to issuers that have issued more debt. In contrast, the Fundamental Index approach developed by Research Affiliates weights bonds based on each country’s economic footprint, resulting in a portfolio that is correlated to a country’s debt service capacity.
“Weighting by fundamentals gives higher portfolio weights to issuers with lower leverage and better debt service capacity, resulting in generally lower credit risk compared to the cap-weight benchmark,” says Shane Shepherd, senior vice president and head of fixed-income research at Research Affiliates. “In addition, a regular rebalance back to fundamental weights takes advantage of potential market inefficiencies in credit spreads by buying cheaper bonds and selling more expensive ones.”
PFEM is based on the Citi RAFI Bonds Sovereign Emerging Markets Extended Local Currency Index. The fund generally will invest at least 80 per cent of its total assets in bonds that comprise the index. The index measures the potential return of a portfolio of bonds issued by the national governments of 18 emerging market countries, all in the respective local currency. To qualify for the index, countries must have at least a minimum domestic sovereign debt rating of “CC” by S&P and “Ca” by Moody’s. Research Affiliates and Citigroup Index jointly select the emerging market countries in the index and country weights are determined once per year based on the RAFI methodology. The fund and the index are rebalanced quarterly.
As of 30 April, the index included bonds issued by the national governments of Brazil, Chile, China (offshore), Colombia, the Czech Republic, Hungary, Indonesia, Israel, Malaysia, Mexico, Peru, the Philippines, Poland, Russia, South Africa, South Korea, Thailand and Turkey.
