Fran Rodilosso, a VanEck fixed income ETF expert, considers the chances of a weaker dollar in 2019 and how this would lend itself to emerging market local currency fixed income exposure.
Rising rates and a stronger dollar drove much of the narrative in the market last year, but for 2019 it’s less clear whether these themes will continue to dominate. “Although there are valid reasons to expect more of the same, we believe there are several drivers that may lead this trend to pause or even reverse,” said Fran Rodilosso, Head of Fixed Income ETF Portfolio Management at VanEck.
“In the event that US dollar strength slips, we believe this could lead to opportunities in emerging markets’ local currency bonds. A weaker dollar also reduces the cost of hard currency funding for emerging markets issuers, providing support for hard currency assets as well. Importantly, local currencies are already at historically low valuations against the US dollar, and could provide a catalyst for currency appreciation this year.”
The lowest-cost EM local currency UCITS ETF in the European market
Emerging markets’ local currency debt offers multiple potential benefits within a portfolio. It provides investors the opportunity to diversify their interest rate exposure, while benefiting from attractive yields and potential currency appreciation. The VanEck Vectors J.P. Morgan EM Local Currency Bond UCITS ETF (EMLC) provides access to emerging markets’ local currency sovereign bonds. It seeks to track the J.P. Morgan GBI-EMG Core Index (GBIEMCOR), which is comprised of bonds issued by emerging market governments and denominated in the local currency of the issuer. Globally, VanEck manages around $5.5 billion of emerging markets’ local currency debt strategies. To date the ETF is the lowest-cost EM local currency UCITS ETF in the European market, which allows investors to benefit from the potential opportunities the asset class offers.
ETFs: a simple solution
For investors and allocators looking for exposure to local currency bonds, ETFs may provide “one-trade” access to cost-effective beta exposure. As an asset class, emerging market bonds represent a wide swathe of countries, each with their own distinct trading characteristics, especially in their local markets. ETFs allow investors and asset allocators to bypass the operational and regulatory complexities of trading in many of those countries, while gaining exposure to the underlying bond and currency returns.
“The local currency bond market has grown to become the largest part of the broader investable emerging markets debt opportunity set,” Fran Rodilosso continued. “This has led to greater liquidity in the form of generally tight bid/ask spreads and high trading volumes with significant participation by both local institutions and foreign investors.”
Real-world considerations
Unlike active portfolio managers who seek to beat their benchmark, passive portfolio managers are trying to match the benchmark as closely as possible, after fees and expenses. Because the benchmark index is not a traded security, the portfolio manager must take into account real-world considerations that are not reflected in the index, including operational, trading, tax and cash flow factors. These can result in differences between portfolio and index returns, even in a portfolio that fully replicates its index. For example, the requirement to custody bonds locally in certain markets can result in higher safekeeping costs, not reflected in the index. Similarly, fixed income indices do not typically take withholding taxes into account.
Important Disclosures: Information contained in this article does not constitute any legal, tax or investment advice. This document does not constitute an offer to sell or solicitation to buy any security. VanEck Vectors J.P. Morgan EM Local Currency Bond UCITS ETF is a sub-fund of VanEck Vectors® UCITS ETFs plc., organised under the laws of Ireland. Any investment decision must be made on the basis of the prospectus and the key investor information document (“KIID”), which is available at www.vaneck.com and VanEck Investments Limited at its registered office at 25-28 North Wall Quay, Dublin 1, Ireland. Investment fund investing involves risk, including possible loss of principal.
The VanEck Vectors J.P. Morgan EM Local Currency Bond UCITS ETF (the Fund) is not sponsored, endorsed, sold or promoted by J.P. Morgan and J.P. Morgan makes no representation regarding the advisability of investment in the VanEck Vectors J.P. Morgan EM Local Currency Bond UCITS ETF (the Fund). J.P. Morgan does not warrant the completeness or accuracy of the J.P. Morgan GBI-EMG Core Index. J.P. Morgan is the marketing name for JPMorgan Chase & Co., and its subsidiaries and affiliates worldwide. Copyright 2019 JPMorgan Chase & Co. All rights reserved.
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