BlackRock, in partnership with JP Morgan, has launched a new fixed income ETF in the US providing comprehensive exposure to USD bonds from sovereign and corporate emerging market issuers.
The ETF seeks to diversify its emerging markets exposure by utilizing a 10% country cap.
The iShares JP Morgan Broad USD Emerging Markets Bond ETF (BEMB US) has been listed on Cboe BZX Exchange with $40 million in initial assets.
Investors wishing to gain multi-sector exposure to USD emerging market bonds using iShares ETFs would previously need to invest in two separate funds – the $15.3 billion iShares JP Morgan USD Emerging Markets Bond ETF (EMB US), which targets sovereign bonds, and the $330m iShares JP Morgan EM Corporate Bond ETF (CEMB US), which focuses on corporate issuers.
Investors can now access both exposures in a single trade and at a notably lower cost – BEMB comes with an expense ratio of 0.18% while EMB and CEMB are priced at 0.39% and 0.50%, respectively.
Methodology
BEMB is linked to the JP Morgan EM Sovereign and Corporate Credit Core Index which covers US dollar-denominated fixed and floating-rate debt instruments issued by sovereign, quasi-sovereign, and corporate issuers from emerging markets.
A country is classified as an emerging market by JP Morgan if its Gross National Income (GNI) per capita is below $20,938 or its Purchasing Power Parity (PPP) Index ratio (((GDP at current prices in USD)/(GDP in current prices at PPP dollars)) * 100) falls below 62.9 for three consecutive years. A country loses its EM status if its GNI per capita or PPP Index ratio rises above these ceilings.
To be eligible for inclusion in the index, sovereign and quasi-sovereign issuers must have a notional amount outstanding of at least $1 billion while corporate issuers are required to have a minimum notional amount of $500m.
Eligible issues must have remaining maturities greater than 2.5 years to enter the index where they may remain until they have less than 12 months remaining until maturity.
Constituents in are weighted by market value outstanding subject to a country cap of just 10%, a move that aims to provide a more even distribution of weights across the countries in the index compared to other mainstream emerging market bond benchmarks.
The index is rebalanced on a monthly basis.
BlackRock is not yet publishing the ETF’s yield but the fund has an effective duration of 5.8 years and an option-adjusted spread of 267.1 basis points.
The ETF is well diversified at the country level with the largest exposures being China (5.3%), Mexico (4.4%), Brazil (3.9%), and Saudi Arabia (3.8%).
Nearly half (47.2%) of the ETF was allocated to securities from sovereign issuers with agency bonds making up 18.6% and other significant sector exposures including industrials (19.4%) and financials (9.0%).
More than half of the ETF was allocated to bonds rated investment grade including securities with ratings of BBB (30.1%), A (17.9%), and AA (7.9%). Other notable exposures included bonds rated BB (20.7%) and B (15.2%).
The ETF makes distributions to investors on a monthly basis.