UBS launches short-term emerging market bonds ETF

Nov 23rd, 2017 | By | Category: Fixed Income

UBS Asset Management has launched the UBS JP Morgan USD EM Diversified Bond 1-5 UCITS ETF (SEMC LN), providing exposure to short-term emerging market debt from sovereign, quasi-sovereign, and corporate issuers.

Simone Rosti, head of passive & ETF specialist sales Europe at UBS Asset Management

Simone Rosti, head of passive & ETF specialist sales Europe at UBS Asset Management.

The fund tracks the JP Morgan USD Emerging Markets Diversified 3% capped 1-5 Year Bond Index, which contains selected short-term, liquid securities that have high credit quality from the JP Morgan CEMBI Broad Diversified (corporate bonds) and JP Morgan EMBIG Diversified (sovereign and quasi-sovereign bonds) indices. For sovereigns, only bonds issued from EM countries with gross national income per capita below the index income ceiling for three consecutive years will be eligible. For corporates to be eligible, issuers must be either headquartered in an EM country or have 100% of their assets within EM economies.

The index provides broad geographical diversification across more than 60 countries. The bonds contained in the index are exclusively denominated in US dollars and include both fixed and floating rate securities with amounts outstanding in excess of $500 million. Corporate issues rated lower than B- are excluded from the index and country weights are capped at 3% to reduce single country concentration.

According to UBS, the fund is aimed at delivering a yield pick-up relative to developed market fixed income exposures. The underlying index is currently yielding 4.6% and has a duration of 2.8 years. Using back-tested data, the index has returned approximately 6% per annum since December 2006 with an annualized volatility of approximately 5.9%.

Simone Rosti, head of passive & ETF specialist sales Europe at UBS Asset Management, said: “With this launch, UBS Asset Management is reinforcing its fixed income product suite by offering investors the opportunity to invest in this distinct emerging market asset class. This is the first ETF to blend together EM sovereign and corporate bonds targeting short duration. It also uses a 3% country capping which is shown to deliver a better risk-return profile compared to uncapped EM fixed income indices.”

The fund has been listed on London Stock Exchange in pounds sterling, Deutsche Börse and Borsa Italiana in euros, and on SIX Swiss Exchange in US dollars.

Its total expense ratio is 0.42%.

By targeting a range of issuers in the short-term emerging market space, the fund is a first of its kind in Europe – an impressive feat given the increasing saturation in the European ETF industry.

ETFs providing exposure along the same lines as the new UBS fund include the SPDR BofA Merrill Lynch 0-5 Year EM USD Government Bond UCITS ETF (SEMH LN). It targets dollar-denominated short-term emerging market bonds issued by sovereigns only. It has AUM of $141m and a TER of 0.42%.

Alternatively, the iShares JP Morgan $ EM Bond UCITS ETF (SEMB LN) provides exposure to sovereign and quasi-sovereign bonds, denominated in US dollars, from across the maturity curve. It has significant AUM of $7.9bn and a TER of 0.45%.

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