The ETFS Lombard Odier IM Emerging Market Local Government Bond Fundamental GO UCITS ETF (LOCL LN) is designed to provide exposure to the local currency debt of emerging markets countries that are best placed to repay their debt.
According to LOIM, the fund aims to provide quality-based diversification to the emerging market local currency debt asset class by employing a weighting scheme based on fundamental factors of creditworthiness, liquidity, value and investability.
Emerging market sovereign bonds offer an appealing yield, particularly when compared to developed economies; however, unlike market-cap benchmarks, which allocate more to countries with higher levels of debt, a fundamentals-based approach offers a more intuitive weighting methodology.
Kevin Corrigan, Head of Fundamental Fixed Income, LOIM, commented: “We are extremely pleased to introduce our emerging market local government bond ETF to the European market. As interest rates in advanced economies remain depressed, relative valuation dynamics in emerging market debt are becoming interesting and our fundamentally weighted approach provides greater quality-focused diversification for investors. LOIM has over five years of experience in fundamentally weighted fixed income investing and our partnership with ETF Securities enables us to offer a wide range of investors an innovative approach to investing in emerging debt markets.
This is the fourth fund in the LOIM + ETF Securities range of fundamental fixed income ETFs, which also includes the ETFS Lombard Odier IM Euro Corporate Bond Fundamental GO UCITS ETF (FWEC LN), the ETFS Lombard Odier IM Global Corporate Bond Fundamental GO UCITS ETF (CRED LN) and the ETFS Lombard Odier IM Global Government Bond Fundamental GO UCITS ETF (CORE LN)
“The suite of ETFs that we have brought to the market with Lombard Odier IM aim to capture the increasing shift towards more cost-effective investment solutions but, at the same time, provide an improved risk-adjusted return profile. Our first three products, launched in March, were well received and investors have already expressed their interest in the launch of this innovative emerging market ETF,” said Howie Li, Co-Head of CANVAS at ETF Securities.
The fund tracks the LOIM Fundamental EM Local Currency Index, which is constructed based on their proprietary fundamentally weighted methodology. By focusing on the creditworthiness rather than the market capitalisation of debt, the index aims to achieve higher risk-adjusted returns relative to widely-used market capitalisation benchmarks. This systematic approach to diversification is achieved by attributing index weights according to issuers’ fundamental characteristics including macroeconomic, credit, social and demographic factors. Fundamental allocation is then adjusted based on liquidity and yield factors.
The fund’s alternative weighting process leads to significant divergences from market-cap weighted benchmarks such as the JP Morgan GBI-EM Global Diversified Index. According to data from Lombard Odier, as of 30 April 2015, the index was overweight bonds in China and India (both countries have zero weight in the selected benchmark) as well as Russia. The fund also had underweight allocations to South Africa, Poland, Malaysia and Mexico. With regards to credit ratings, the index had a larger allocation to higher-rated (AA3) and lower-rated issues (BAA3, BA1 and BA3), while being underweight issues with credit ratings between A2 and BAA2.
As of 1 September 2015, the ETF held 242 constituents with the largest country weightings being China (10.5%), India (9.7%), Russia (9.7%), Brazil (7.8%) and Indonesia (6.2%).
The fund trades in US dollars on the London Stock Exchange and carries a total expense ratio of 0.55%.