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ETFs to Capture the Higher Yields of Asian Bonds

Emerging market bonds offer more attractive income levels than fixed income in the US or UK. And Asian bond markets are less oil dependent than those in Russia and Brazil

Jose Garcia-Zarate 27 November, 2015 | 9:31AM

This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.

Why invest in emerging market bonds? The most obvious lure lies in the comparatively higher yields on offer relative to their domestic markets. Even accounting for interest rates rising in the US – to be followed by the UK at some stage – the overall bond market environment remains characterised by very low yields across the maturity spectrum. This is particularly obvious in the eurozone, where it is widely expected there will be a further upping of accommodative monetary policy settings into 2016.

Seen from this simple perspective, investing in emerging markets bond markets may look something of a no-brainer for the yield-hungry. However, increasingly, investors are becoming aware of the need to discriminate between individual emerging markets countries. Indeed, within this heterogeneous group of countries, the ones suffering particularly badly are those with economic models underpinned on their commodity export potential – think Russia, or to some extent Brazil.

By contrast, most Asian emerging markets – particularly the two giants, China and India – do not fall in that bucket. This is not to say they are not experiencing challenges. Indeed, who can ignore the stream of media headlines shouting out about the slowdown in China?

Still, the point remains that their macroeconomic build is pinned to a variety of pillars. This puts them in a competitive advantage relative to commodity-dependant emerging markets peers to adapt and transition their economic models to the changing realities of the international economic cycle.

Part of the transition already in motion is the easing of access to their financial markets to international investors. Examples of this include the recent inaugural sale of Chinese short-term government debt in London or the easing of restrictions to foreign ownership which are part of India Prime Minister Modi’s reformist agenda. 

All in all, the international perception about the Chinese and Indian bond markets seems to be moving from a position of inaccessibility to one worthy of mainstream attention. Unsurprisingly, the highly dynamic ETF industry, always on the lookout for evolving investment trends, has been quick to respond with products offering access to both these markets.

ETFs to Make the Most of Asia Bonds

The db x-trackers Harvest CSI China Sovereign Bond ETF (CGB), launched in July 2015, tracks an index which measures the performance of the market of medium-term i.e. four to seven years maturity, onshore Chinese government renminbi-denominated bonds traded on the Shanghai and Shenzhen stock exchanges and in the PRC inter-bank bond market. The ETF is physically replicated and carries an ongoing charge of 0.55%. The investment manager of the fund, Harvest Global Investments Ltd, holds a RQFII licence from China’s Securities Regulatory Commission.

A more recent arrival to the European ETF marketplace is the LAM Sun Global ZyFin India Sovereign Enterprise Bond ETF, listed in London and Frankfurt in mid-November. This ETF, the product of a partnership between ZyFin, an India-focussed asset manager, and Sun Global, a London-based financial services company, offers exposure to a basket of Rupee-denominated bonds issued by Indian Sovereign Owned Enterprises. These are corporations, including financials, which are majority owned – 51% or more – by the Indian government. The ETF is physically replicated and comes with a variable ongoing charge structure with 0.99% as a maximum. The estimated annual ongoing charge as the time of launch was 0.79%.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Jose Garcia-Zarate

Jose Garcia-Zarate  is a senior ETF analyst with Morningstar Europe.