Thu, 12/09/2019 - 12:27
Algo-Chain’s Allan Lane casts his eye over the latest ‘cutting edge’ ETF offering from UBS, an emerging markets bond fund with an added ESG element…
In a world where too many investors display a ‘home bias’, my colleague and I often cross swords on what constitutes a realistic Model Portfolio. As a member of Feynman's awkward squad I see no reason to exclude a portfolio that comprises 100 per cent Emerging Market assets. However, until recently, the lack of choice in the Fixed Income Emerging Markets ETF space, relegated this discussion to the side lines. How times have changed. The launch of the UBS ETF (LU) JP Morgan USD EM IG ESG Diversified Bond UCITS ETF, with ticker EMIG LN, adds to the list of Emerging Market investment grade bond ETFs, and is the first one that doffs its hat to the ESG movement.
Over the years, my own style of thinking has been strongly influenced by the philosophy of Richard Feynman, the Nobel Prize winning physicist best known for his autobiography, ‘Surely, you're joking Mr Feynman?’. When faced with a viewpoint I often ask myself – what would Feynman think? In this case I’m pretty certain he would be happy with a 100 per cent allocation to Emerging Markets assets.
This fund’s jargon-infested name gets zero points, which is a shame really because yet again the Swiss show they mean business when it comes to providing cutting edge investment products. For an annual management fee of 0.45 per cent, this ETF provides exposure to a portfolio of investment grade bonds, covering a diverse set of US Dollar-denominated Emerging Market fixed and floating-rate debt instruments classified as investment grade with the added bonus of having the issuing companies screened on their ESG scoring.
With the issuance, including Sovereigns, Quasi-Sovereigns and Corporates from jurisdictions such as Uruguay, Kuwait, Peru, Russia, Qatar and Poland, and that’s just for starters, diversification of the ETF’s bond supply is the name of the game. JP Morgan’s index business has screened out those corporate bond issues that don’t meet the criteria of their in-house sustainability metric. In practice this currently leaves 809 bonds in the index, 766 of which can be found in the ETF. A point that will not be lost on those investors familiar with this asset class is the realisation that, by limiting one’s focus to investment grade bonds, it neatly excludes the sovereign bonds from the likes of Argentina, Venezuela and Turkey, which have all seen very big negative market moves.
With a yield to maturity of 4.1 per cent, this product is clearly aimed as an antidote to the record low yields that most Developed Market bond ETFs are currently offering. No doubt the doubting Thomas amongst us can find improvements to some aspects of this fund's construction that they will not like, but if you want income from investment grade bonds, then you had better look offshore.
It would be evasive of me not to mention the issue of currency risk that goes hand in hand with these products. As a portfolio of USD denominated assets, then as a UK investor one at least knows what that currency risk looks like, and at a superficial level this is the same currency risk that comes with investing in US Treasury bonds. A rising USD brings problems to the Emerging Market bond issuers as they might struggle to keep up with the coupon payments, so net net, there are these additional factors one should take into consideration before investing.
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