Australian investors can now access emerging market debt through a new active exchange-traded fund, the VanEck Emerging Income Opportunities Active ETF (EBND), the first active ETF the investment house has launched in Australia.
With a 5% per year target yield, the fund aims to offer Aussie investors the opportunity to access potentially higher returns on offer in emerging markets debt compared to developed markets.
The fund aims to invest in undervalued bonds in emerging markets in both hard and local currencies. It attracts a management fee of 0.95% plus brokerage.
The launch comes just a month after the ASIC lifted its ban on opaque active ETFs paving the way for global asset managers to flood Aussie exchanges with their active products.
Commenting on the fund, Pete Pennicott, a director of financial advice firm Pekada, notes at a time where yields are low, investors need to broaden their horizons to find opportunities for income.
So an allocation to emerging markets should be part of their due diligence when constructing a portfolio. “In the right portfolio and at the appropriate allocation it may be a valuable diversifier and source of income.”
Nevertheless, Pennicott says this type of investment exposure is not for everyone and investors should not be expecting a 'free lunch' in terms of higher yield. “There are additional layers of risk, including currency, credit issuer quality and geopolitics. I would encourage investors allocating capital to emerging markets to do their research and ensure they are comfortable with the risk/return trade-off.”
The fund is benchmarked to a blend of two indexes, the JP Morgan Emerging Market Bond Index Global Diversified Hedged Australian Dollar and the JP Morgan Government Bond Index-Emerging Markets Global Diversified.
The VanEck Emerging Income Opportunities Active ETF is just one of a number of different vehicles through which investors can access emerging markets debt. As Kyle Frost, an independent financial adviser with Millennial Independent Advice notes, diversified global bond ETFs offer investors a small allocation to emerging markets bonds of about 5%.
Factor investing in emerging markets
"Investors wishing to go overweight emerging market bonds can get index exposure with the iShares JP Morgan US dollar Emerging Markets Bond (Australian dollar hedged) ETF, which costs 0.51% a year. This gives investors access to potentially higher returns while accepting the higher risk and volatility within the defensive portion of their portfolio.
"VanEck’s latest offering is an extension of this, giving investors access to an actively-managed portfolio seeking to outperform the index," Frost says.
“VanEck may well deliver with this fund. But the arithmetic of passive investing continues to apply in emerging and bond markets. With a cost of 0.95% a year, this may prove difficult to overcome, with VanEck’s fund comfortably be the most expensive fixed income ETF on ASX,” he adds.
Frost notes while data is limited in Australia, US SPIVA (S&P Indices Versus Active) data to 30 June 2019 shows how difficult it is to beat an index. “No emerging markets debt funds have beaten the index over a 10-year period and most struggle to outperform the index across other periods, resulting in material underperformance.”
Percentage of Fixed Income Funds Outperformed by BenchmarksFund CategoryComparison Index1-Year %3-Year %5-Year %10-Year %15-Year %Emerging Markets Debt FundsBloomberg Barclays Emerging Markets79.6366.6796.1510085.71
Emerging markets have historically been volatile and time will tell how VanEck’s new fund performs over an extended period.