Want To Leverage EM Bond Gains (or Losses)? Here's An ETF

The hunt for yields is common in a low rate environment. This holds good for investors in the U.S. market where yield on the 10-year U.S. Treasury note was hovering around 2.22% as of August 22, 2017, despite two rate hikes this year. As a result, investors turn to emerging market bond ETFs in search of higher yields.

iShares J.P. Morgan USD Emerging Markets Bond ETF (AX:EMB) is up about 5% this year (as of August 22, 2017) while PowerShares Emerging Markets Sovereign Debt ETF (TO:PCY) is up about 4.6% (read: Why Investors Poured Money into Global Bond ETFs in Q2).

Probably, this is why Direxion launched a leveraged EM bond ETF Direxion Daily Emerging Markets Bond Bull 3X Shares (AX:EMB) .

Inside EMBU

The fund looks to track the daily investment results of 300% of the performance of the J.P. Morgan EMBI Global Core Index. Geographically, the fund’s top three holdings go to Mexico (6.03%), Indonesia (4.96%), Turkey (4.55%) and Russia (4.44%). The net expense ratio of the fund is 1.07%.

The index lowers the weights of countries with higher outstanding debt and puts more focus on countries with lower outstanding debt. It includes both fixed-rate and floating-rate instruments issued by sovereign and quasi-sovereign entities, as per the issuer.

How Does it Fit in a Portfolio?

For investors believing in the emerging market rebound and looking to focus on steady source current income, this fund can be a good choice. The Fed is on a policy tightening mode but U.S. Treasury bond yields are still at subdued levels.

Such low yields are driving investors toward high-yielding EM ETFs. Plus, fixed-income securities are always less risky than equities. Even if EM bond ETFs end up facing capital losses, the regular stream of current income will guard investors’ portfolio. Also, the clip of credit rating downgrades in EMs have slowed in recent times, though worries remain (read: Dollar Denominated EM Bond ETFs: A Good Play for 2017?).

EM economies are a lot more protected from Fed-tightening shocks this time than they were in 2013, which is remembered for the taper-tantrum. As a result, strong fundamentals have lately called for EM investing.

However, emerging markets are commodity rich. So, the ongoing stress in the oil patch may not bode well for EM funds. Plus, if the Fed speeds up tightening, the greenback is likely to shoot higher. This will dent overall commodity investing.

ETF Competition

Apart from EMBU, there are about three leveraged EM ETFs, namely Direxion Daily MSCI Emerging Markts Bull 3x ETF (AX:EDC) , ProShares Ultra MSCI Emerging Markets EET and iPath Long Enhanced MSCI Emerging Markets Index ETN EMLB, but nothing is on the bond market (see all Leveraged Equity ETFs here).

While EDC looks to offer 300% of the price performance of the MSCI Emerging Markets Index, EET gives twice (200%) the daily performance of the same index. On the other hand, the ETN EMLB is designed to provide investors with leveraged return on the performance of the MSCI Emerging Markets Net Total Return Index. From this perspective, the newbie falls in a competition-free arena.

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