Deutsche introduces currency hedging for smart beta EM bond ETF

Aug 9th, 2017 | By | Category: Fixed Income

Deutsche Asset Management has unveiled the db x-trackers iBoxx USD Emerging Sovereigns Quality Weighted EUR-hedged UCITS ETF (XQUE) on Deutsche Börse’s Xetra and Frankfurt exchanges. The fund provides smart beta exposure to high quality emerging market government bonds while mitigating currency risk between the US dollar-denominated bonds and the ETF’s trading currency – the euro.

Deutsche launches smart beta emerging markets bond ETF on Deutsche Börse

XQUE provides exposure to a portfolio of US dollar-denominated emerging market bonds weighted by the government’s perceived capacity to pay.

The underlying reference for the fund is the Markit iBoxx USD Emerging Markets Sovereigns Quality Weighted Index. Eligible bonds must have a minimum credit rating of ‘B’ and the index components are weighted according to fundamental data such as per capita GDP, rate of inflation, national reserves as a percentage of GDP, national debt as a percentage of GDP and a percentage of exports, default history and global competitiveness of the country. In this way the index increases exposure to governments who are perceived to be more capable of repaying their debt.

The index consists of over 320 constituents from 45 emerging market countries with the largest weightings going to Turkey (10.2%), Indonesia (8.8%), Mexico (7.2%), Russia (6.3%) and Qatar (5.8%). The index’s yield-to-maturity is currently 4.3% but there is relatively high interest rate risk with an effective duration of 7.3 years (data as of 31 July 2017).

Income generated by the fund’s constituents is distributed quarterly to investors and the fund has a total expense ratio (TER) of 0.55%.

An unhedged version of the fund (Ticker: XQUA) is available on the London Stock Exchange in US dollars or on Deutsche Börse and Borsa Italiano in euros. It has approximately $40 million in assets under management (AUM) and a TER of 0.50%.

Investors may also gain access to a fundamentally weighted portfolio of US dollar-denominated emerging market debt through the ETFS Lombard Odier IM Emerging Market Local Government Bond Fundamental GO UCITS ETF (LON: LOCL). The fund has AUM of $330m and a TER of 0.55%.

There are a number of ETFs in Europe offering exposure to a market value-weighted portfolio of US dollar-denominated emerging market bonds. The cheapest is the Vanguard Emerging Markets Government Bond UCITS ETF (LON: VDET) which has AUM of $205m and a TER of 0.25%, and the largest is the iShares JP Morgan $ EM Bond UCITS ETF (LON: JPEA) which has over $8 billion in AUM and a TER of 0.45%.

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