Choosing an Emerging Market Bond ETF

I have been looking for good liquid vehicles to invest in fixed income securities outside the US. There are many open-end mutual funds available, but they generally have high expense ratios and exit redemption fees. I often own closed-end funds that invest in emerging market debt, but they are not always the most liquid securities.

I did a comparison of two emerging market bond ETFs:  Blackrock’s EMB versus Invesco PowerShare’s PCY. The two ETF’s normally trade closely with a six month (126 day) correlation of 0.88. The underlying index for EMB is JPMorgan EMBI Global Core Index, while PCY’s underlying index is the DB Emerging Markets USD Liquid balanced Index.

I use the XTF “ETF Experts” product which has a structural integrity analysis that gives a good overview of the trading efficiency of any ETF. I focus on four main factors in tax deferred retirement accounts:

  • b. Efficiency: daily alpha before expenses
  • c. Market Impact
  • f. Expense Ratio
  • g. Bid-Ask Ratio

Here is a summary of some the key factors I look at from the XTF system. I have highlighted in boldface the higher rated ETF for each factor.

Yield 5.23% 6.26%
Market Cap $1B $656MM
Expense Ratio 0.60% 0.50%
Avg Bid-Asked Ratio 0.15% 0.07%
Market Impact 0.35% 0.21%
Efficiency (BPS) -2.18 -0.80
Premium (Discount) 0.68%  -0.23%
Avg Trade Size 294  393
Avg Daily Volume 194,556  312,811


Based on the above data points, PCY scores higher on eight out of the nine factors, although the average trading dollar volume for EMB is higher than for PCY, because its share price is about four times as high.

EMB currently has a higher market cap and may still be a better choice for very short term trading, but I think this will change if PCY continues to lead in the other areas. For now, I would plan to use PCY as the better trading vehicle for intermediate and longer term holding periods.

Full disclosure: No position in EMB or PCY.


One response to “Choosing an Emerging Market Bond ETF


    Comparing the ETFs and the mutual fund reveals that EMB has an expense ratio of 0.6%, PCY has an expense ratio of 0.5%, and PEMDX has an expense ratio of 1.3%. There is also a $2,500 investment minimum for the mutual fund.

    Year to date, EMB and PCY have risen by 3.6% and 4.6%, respectively, while PEMDX has gone up by 4.2%. However, in the past year, EMB has gone up by 29.1% while PCY has increased by 31.2% and PEMDX has seen gains of 34.4%.

    I prefer to look at net performance, prefer high expense high performance over low expense low performance.

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