ELD Wisdom Tree Emerging Markets Local Debt Fund

Even with stocks at near-record highs, investors haven’t given up on bonds. The bond ETF world has seen inflows of over half a billion to start 2013 with one year figures showing nearly $40 billion of inflows.

However, these inflows haven’t been focused on treasury bonds, but instead on riskier corners of the market with a focus being on corporate debt. This segment of the fixed income world has accounted for the bulk of the inflows and it has driven many issuers to launch new products in this increasingly popular segment.

The latest iteration of this trend comes to us from WisdomTree, a firm that has been stepping up its presence in the bond world. Its newest fund is the Global Corporate Bond Fund (GLCB), looking to give investors broad exposure to corporate securities, no matter where they are in the world (read 3 Actively Managed Bond ETFs for Stability and Income).

GLCB in Focus

The product looks to charge investors 45 basis point a year for this exposure, employing active management techniques. This will be done via a partnership with Western Asset Management Company, a firm that currently oversees more than $115 billion in global bond debt.

Western Asset Management believes that it can add to a bond portfolio by looking at relative value in the context of risk while also using a disciplined credit research approach. The company also looks to employ a strict sell discipline using a top-down assessment of the global economy, and then a bottom-up analysis on a company by company basis.

This approach currently results in a portfolio that has about half of its holdings in American bonds, and then about 33% in the EMEA region. Outside of the USA, the top five countries include the UK, Italy, Russia, and Mexico, suggesting a decent—although not huge—allocation to emerging markets (see Seven Biggest Bond ETFs by AUM).

In terms of credit quality, securities in the ‘A’ range dominate, accounting for roughly two-fifths of the portfolio.  ‘BBB’ securities take the next spot at about 25% of the assets, followed by 15% to ‘B’ rated bonds.

Investors should also note that the interest rate risk of the fund looks to be moderate, falling between two and ten years, depending on global conditions. Additionally, the product will look to hedge out some non-US currency risk, so investors shouldn’t have to worry too much about foreign exchange swings impacting their investment.

Can it Succeed?

Actively-managed products have a rocky track record when it comes to the ETF world. Some investors refuse to embrace them as a rule, while others have begun to see the potential in some asset classes.

This is especially true in the bond world where markets are less efficient and pricing mismatches can be more likely. Given that this product looks to have a big focus on international securities, this could be a particularly important issue for GLCB and help to make the case for active management.

Beyond that, many investors remain woefully under-allocated to international securities, both in stocks and even more so in bonds. This is somewhat surprising given the wide number of options that offer exposure to the space but the trend continues nonetheless (read Time to Exit Treasury Bond ETFs?).

This trend continuing could be very damaging in the bond space as WisdomTree’s research shows that global corporate composite hedged indexes have offered up a higher rate of return than any of their investment grade focused counterparts, while still producing a standard deviation that is in line with the US-centric investments.

This suggests that global bonds can bring attractive qualities to a portfolio and help to make a bond component perform better overall. For this reason, WisdomTree believes that their ETF can be thought of as a core holding in the bond space, and one that can be a valuable part of a well-diversified portfolio.

The big test will be if the ETF can obtain a solid level of assets and WisdomTree’s track record on this front has been mixed. Their ELD and ALD products have seen huge inflows but their Europe-focused EU has not (read Is the Best Performing Bond ETF Really in Europe?).

Given this, it will be interesting to see if WisdomTree’s new ETF can compete with some of the big products out there which have a huge US focus but that have built up a massive asset following. GLCB will need to rely on its active management and its well-rounded holdings profile in order to do this, but if some solid performance comes its way there could be room for this fund in the bond world as well.  

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WISDMTR-ASIA LD (ALD): ETF Research Reports
 
WISDMTR-EM LDF (ELD): ETF Research Reports
 
(GLCB): ETF Research Reports
 
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