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Rethinking Risk With Corporate Emerging Market Bond ETFs
Friday, May 18th, 2012
Last month, iShares introduced CEMB, which gives investors exposure to emerging market corporate debt. Since the fund’s launch we’ve fielded some questions from clients wondering why the yield on CEMB is close to the yield on another one of our funds — EMB, which provides access to sovereign emerging market debt.
As of May 11, CEMB had an average yield to maturity of 4.95%, while EMB’s yield was 4.99%. If I’m taking on more risk with CEMB by investing in corporate vs. sovereign debt, clients have asked, why aren’t I receiving a higher yield in return? The answer is because in this case, the risk associated with corporate emerging market bonds might not be as elevated as many investors would think.
First, let’s look at the amount of duration, or interest rate risk, of these two funds. As measured by its duration of 5.5 years, CEMB has less interest rate risk than EMB, which has a duration of 7.42 years as of May 14.
Now, let’s look at the holdings of EMB and CEMB. EMB holds securities backed by emerging market sovereign governments, like Peru, Russia and the Philippines.
CEMB meanwhile gives investors access to the corporate debt of companies domiciled in emerging market countries. It holds the debt of big companies like Brazilian oil company PetroBras International and South African electricity producer, Eskom Holdings. Although the issuers in CEMB are based in emerging markets, many have investment grade credit ratings, including a fair number with AA or A ratings. As the chart below illustrates, the composition of CEMB is slightly higher on the credit rating spectrum than EMB:
Credit Rating Breakdown:
Investors might assume that emerging market corporate bond ETFs would consist of bonds that have lower credit ratings than those in emerging market sovereign ETFs, making them riskier holdings that provide a higher yield. But this chart illustrates that is not always the case, and it helps to explains why a fund like CEMB would have a yield similar to that of EMB.
How could investors consider using CEMB in a portfolio?
1.) Diversify away from US corporate debt: For investors who own a fund like LQD, which holds investment grade US corporate debt, CEMB offers an opportunity to diversify away from US corporate debt while potentially picking up additional yield. LQD’s average yield to maturity was 3.52% as of May 11. Additionally, with low correlations to other fixed income sectors and equities, emerging market corporate bonds can add diversification to investment portfolios. Past performance is no guarantee of future results.
2.) Access the emerging market consumer: As Russ Koesterich has noted, emerging market growth continues to create hundreds of millions of new middle-class consumers. By 2025 China, India and Brazil are respectively expected to be the 2nd, 4th, and 9th largest consumer markets in the world, according to McKinsey. The emerging market corporations whose bonds are held in CEMB are selling their wares to this growing consumer base.
3.) Gain access to emerging market growth with less volatility than emerging market equities. For the past 10 year, emerging market corporate bonds have had total return volatility of 12.5% as compared to 24.4% for emerging market equities, using data from Morningstar and MSCI, as of April 30.
Matt Tucker, CFA is the iShares Head of Fixed Income Strategy and a regular contributor to the iShares Blog. You can find more of his posts here.
Past performance is no guarantee of future results. For the standardized performance of these funds, please click here: CEMB, EMB, LQD.
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling toll-free 1-800-iShares (1-800-474-2737) or by visiting www.iShares.com.
Holdings are subject to change. To view the complete list of holdings for CEMB, please click here.
In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Bonds and bond funds will decrease in value as interest rates rise. Diversification may not protect against market risk.
Copyright © iShares
Tags: Aa, Brazil, BRICs, Cemb, Composition, Corporate Bond, Corporate Bonds, Corporate Debt, Credit Rating, Duration, Electricity Producer, Emb, Emerging Market Bonds, Emerging Market Countries, Emerging Markets, Interest Rate Risk, Issuers, Oil Company, Sovereign Debt, Sovereign Governments, Spectrum, Yield To Maturity
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Earnings Season Cometh (Bespoke)
Wednesday, April 11th, 2012
Earnings season starts this evening with Alcoa’s (AA) quarterly report after the close. Arm yourself this earnings season with our comprehensive Interactive Earnings Report Database. We take earnings analysis to the next level by not only highlighting how the actual reports compare to analyst estimates, but also how the stock price reacted to the report. Users of this database can easily find how a stock or basket of stocks typically reacts to earnings in order to prepare themselves throughout earnings season. Traders can also see how stocks react after gapping up or down on earnings to develop trade ideas. If IBM opens down $2 on earnings, what does the stock typically do next? This database can answer that question and much more for the majority of US stocks that will report this season.
Below is a snapshot of how Alcoa looks when its historical earnings reports are pulled up in the database. As shown, Alcoa has only beaten earnings estimates 41% of the time going back to 2002. The stock has also averaged a decline of 1.39% on all of its report days over this time period. Clearly, Alcoa struggles on earnings, so it should be no surprise if it struggles again after its release this evening. The surprise will be if it actually goes up on the news.
To gain access to our Interactive Earnings Report Database, become a Premium Plus member today.
Tags: Aa, Alcoa, Analyst Estimates, Decline, Earnings Estimates, Earnings Report, Earnings Reports, Earnings Season, Interactive Earnings, Next Level, Quarterly Report, Report Database, Report Users, Snapshot, Stock Price, Stocks, Surprise, Time Period
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A Look at Oil, Natural Gas, Gold and Silver (Bespoke, MarketClub)
Tuesday, May 31st, 2011
Below we provide our trading range charts for four key commodities. In each chart, the green shading represents between two standard deviations above and below the 50-day moving average, and moves above or below the green shading are considered overbought or oversold.
As shown, natural gas is now right at overbought territory, while oil is close to oversold territory. No, that’s not a misprint, natural gas really is at overbought territory, while oil is close to oversold territory.
Gold is also now close to overbought territory once again as it closed the week above $1,530. After the sharp pullback silver saw earlier this month, it has made a decent recovery as well.
The rally in commodities to close out the week coincided with a pullback in the dollar. The US Dollar index broke above its 50-day moving average a couple of weeks ago, and it was even close to breaking its long-term downtrend as we noted earlier in the week. Thoughts of the long-term downtrend coming to an end proved to be wishful thinking, however, and the Dollar index finished off the week back below its 50-day.
[AA] According to MarketClub’s technical indicators, gold is in a solid uptrend, with all three of their trade triangles pointing upward. The monthly triangle signalled in at $1,430.90, the weekly triangle turned on at $1,444.28 and the daily triangle turned on at $1,499.83. The Williams%R indicator says that gold is in overbought territory, and the MACD indicates accumulation. Currently, at the time of this chart, gold was trading at 1,537.68.
Silver shows an uptrend (+65), up 8.3% last week, following the substantial sell-off in the wake of margin requirements being raised. With the monthly (18.74) and daily (35.39) triangles, green, the near term weekly triangle (which turned red at 39.66) is set to turn green, as the price of silver nears the Donnchian channel (purple channel lines) mid-point, and MarketClub’s Adam Hewison says that silver could reach up into the low 40s in the short term. Williams%R took off into the overbought zone at the end of last week, and the MACD shows a solid divergence in favour of accumulation.
Oil too, is experiencing a strong recovery, in the wake of the selloff in early May, and shows a solid uptrend (+100), and monthly and daily MarketClub trade triangles green, and the Weekly triangle still red, having turned so at 106.44. Had you been in crude before the selloff, the effective red weekly sell triangle was loss minimizing.
Williams%R indicates oil is overbought, however, MACD indicates divergence in favour of accumulation.
[AA]
Copyright © Bespoke Investment Group
Tags: Aa, Accumulation, Commodities, Crude Oil, Macd, Margin Requirements, Marketclub, Mid Point, Moving Average, Natural Gas, Price Of Silver, Range Charts, Shading, Sharp Pullback, Standard Deviations, Technical Indicators, Triangle, Triangles, Uptrend, Us Dollar Index, Wishful Thinking
Posted in Markets, Oil and Gas | Comments Off
Fundamental Wins Over Cap-Weighted Indexing, Demonstrates Rob Arnott
Sunday, May 29th, 2011
Rob Arnott, chairman of Research Affiliates, which is famous for bringing fundamental indexing to the investment world, on why this method is superior to traditional cap weighted indexing. His contrarian method which ‘sells whatever is most newly beloved and buys whatever is most newly feared and loathed’ is gaining admirers. He says it delivers 2-3 per cent value add in the developed markets and 3-4 per cent in small companies and emerging markets.
[My firm, Plexus Asset Management, is the South African licence holder for the Research Affiliates Fundamental Indexing (RAFI) over here, and we are seeing very significant outperformance vs the market cap equivalent indices. Do contact me if you want to access the Johannesburg Stock Exchange by means of RAFI technology.]
Click here or on the image below to view the clip.
Rob Arnott, chairman of Research Affiliates, which is famous for bringing fundamental indexing to the investment world, on why this method is superior to traditional cap weighted indexing. His contrarian method which ‘sells whatever is most newly beloved and buys whatever is most newly feared and loathed’ is gaining admirers. He says it delivers 2-3 per cent value add in the developed markets and 3-4 per cent in small companies and emerging markets.
[AA Note] In Canada, RAFI Fundamental Indices are available through mutual funds sponsored by Pro-Index Funds, and ETFs sponsored by Claymore Investments. [AA Note]
Source, Financial Times, May 25, 2011.
Tags: Aa, Admirers, Asset Management, Canadian Market, Claymore Investments, Emerging Markets, ETFs, Financial Times, Fundamental Indexing, Index Funds, Investment World, Johannesburg Stock Exchange, Licence Holder, Market Cap, Mutual Funds, Outperformance, Rafi, Research Affiliates, Rob Arnott, Source Financial
Posted in Canadian Market, ETFs, Markets | Comments Off
Michael Milken on Inflation
Tuesday, December 21st, 2010
Michael Milken of the Milken Institute tells CNBC why he believes inflation will be an issue in 2011. (Milken was indicted in 1989 on charges related to junk bonds, a market he was instrumental in developing, and [AA] was “fall guy” for the excesses of the 80′s bull market. [AA])
Source: CNBC, December 14, 2010
Tags: Aa, Cnbc, ETF, Excesses, inflation, Junk Bonds, Michael Milken, Milken Institute
Posted in ETFs, Markets | Comments Off
