July 26, 2010 by Patrick Watson

ETF sponsors continue to impress with their ability to sniff out new market niches around which to build products.  Van Eck is among the best in this regard.  Last week (7/23/10) the firm introduced Market Vectors Emerging Markets Local Currency Bond ETF (EMLC), a fund whose name describes exactly what it does.

EMLC seeks to replicate the price and yield of the J.P. Morgan GBI-EMG Core Index, which in turn tracks the performance of local currency bonds issued by emerging market governments.  Top country weightings, capped at 10% each, include Brazil, Malaysia, Mexico, Poland, South Africa and Thailand.  Others in the portfolio are Colombia, Egypt, Hungary, Indonesia, Peru, Russia and Turkey.

The unique point about EMLC is that it holds bonds denominated in the local currency of all these countries.  The two nearest competitors, iShares JPMorgan USD Emerging Markets Bond (EMB) and PowerShares Emerging Markets Sovereign Debt (PCY) are both devoted to similar bonds that are issued in U.S. Dollar terms.  Whether this is a plus or minus depends on your outlook for the the greenback.  EMLC is, in effect, a bet that the dollar will fall in value vs. emerging market currencies.  If the bet pans out, EMLC investors will enjoy capital gains from the currency appreciation as well as what appears to be a very attractive yield, presently around 6% after the 0.49% expense ratio is subtracted.

The other side of this coin, of course, is that the dollar could strengthen in comparison to emerging markets currencies, in which case foreign exchange losses might quickly surpass the yield.  There is, of course, no way to know what will happen to the dollar or any other currency in the future which means EMLC is far more than just a conservative income investment.  As Van Eck says in the fine print, investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability.

Given this laundry list of potential catastrophes, one might reasonably ask whether a 6% yield is really sufficient.  Nonetheless, EMLC may have a place as a small slice of a diversified portfolio.  For more information you can consult the EMLC page at the Van Eck web site .

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.