The iShares Morningstar $ Emerging Markets Corporate Bond ETF aims to track the performance of the Morningstar Emerging Markets Corporate Bond Index. This investable index provides diversified exposure to US dollar denominated debt issued by companies based in Latin America, Eastern Europe, the Middle East, Africa and Asia. iShares worked closely with Morningstar to construct the index, which has a cap to ensure no single bond issuer accounts for more than 5 per cent of the index
The ETF will be managed by iShares’ US-based fixed income team. The team will use sampling to replicate the performance of the index. Sampling means that although the ETF will physically invest in the index it is tracking, rather than use derivatives, it will not hold all the constituent stocks at the same weighting as the index.
iShares says investors are recognising the value of a passive approach to fixed income and are looking for greater choice within the asset class. Dollar-denominated emerging market corporate bonds are seen by iShares as a good fit for an ETF, especially as the amount of dollar-denominated debt issued by emerging market companies has increased in the last 10 years. As issuance has grown, credit quality hasimproved and liquidity has increased, creating better opportunities for investors.
Emerging market corporate bonds have the potential for attractive returns and an ETF can provide access to this type of investment in a liquid and cost-effective way.
Fixed-income specialist PIMCO points out that emerging market corporate bonds tend to suffer when markets are volatile because risk appetite among investors falls, but this should change over time as the market matures.