local or hard currency

Comparing SEMB to SEML

Introduction

The SMEL pays more and has a lower duration than SEML. However, is it less diversified and contains local curreny risk.

 

iShares J.P. Morgan $ EM Bond UCITS ETF –  The Fund seeks to track the performance of an index composed of US Dollar denominated bonds from Emerging Market countries.

iShares J.P. Morgan EM Local Govt Bond UCITS ETF – The Fund seeks to track the performance of an index composed of local currency government bonds from Emerging Market countries.

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Comparison chart – (Feb 2018)

type semb seml difference
Total Expense Ratio 0.45% 0.50% 0.05%
distribution freq monthly semi-annual
Securities Lending Return 0.03% 0.01% -0.02%
Use of Income Distributing Distributing
Number of Holdings 400 212 -188
Distribution Yield 4.54% 4.74% 0.20%
Weighted Average YTM 5.27% 5.84% 0.57%
Weighted Avg Maturity 11.69 7.6 -4.09
Effective Duration 7.27 5.05 -2.22

 

Exposure Breakdowns

Exposure breakdown by country. SEML is concentrated to fewer countries with a higher % per country.

 

SEMB % SEML %
Mexico 6.12 Mexico 10.06
Indonesia 4.91 Poland 9.96
Turkey 4.4 Indonesia 9.92
Russian Federation 4.38 South Africa 9.84
Argentina 4.06 Thailand 6.96
China 3.95 Brazil 6.78
Philippines 3.95 Russian Federation 6.71
Brazil 3.74 Turkey 6.28
Colombia 3.49 Colombia 6
Ukraine 3.23 Malaysia 5.3
Ecuador 3.23 Hungary 4.41
Kazakhstan 3.22 Czech Republic 3.91
South Africa 3.19 Romania 3.15
Peru 3.16 Peru 2.92
Oman 3.07 Chile 2.89
Lebanon 2.77 Argentina 1.66
Dominican Republic 2.75 Cash and/or Derivatives 3.26
Hungary 2.67
Poland 2.62
Malaysia 2.35
Egypt 2.32
Uruguay 2.2
Panama 1.78
Sri Lanka 1.7
Chile 1.69
Croatia (Hrvatska) 1.53
Romania 1.48
Azerbaijan 1.27
Venezuela 1.23
Jamaica 1.11
Nigeria 1.11
Pakistan 1.05
Cash and/or Derivatives 0.35
Other 9.93

 

Poland, Indonesia and South Africa constitute differences of > 5% in index weightings.

Thailand and Czech equst in SEML but not in SEMB.

The credit quality ratings of SEML are higher than SEMB. However, this is in part due to the fact that obligations only need to be met in the local currency for which the central bank can print it’s own currency saving a default at the expense of a currency devaluation. The denomination of all bonds in the SEMB index is USD.

Observations – Feb 2018

Total expense ratio (less the securities lending return) – SEML is more expensive to run. Generally speaking, 0.5% is among the highest charges for any iShares index so both indices are high with SEML being marginally more expensive than SEMB.

Number of Holdings – SEMB has considerably more holdings.

Distribution Yield – SEML pays more than SEMB.

Weighted Average YTM – SEML pays more than SEMB.

Weighted Avg Maturity – SEML has a lower average maturity than SEMB

Effective Duration – SEML has a lower duration than SEMB

 

Overall

On measuring the data it is observed that SEML is higher yield and lower duration than SEMB. The actual distribution yield of SEML is 0.20% higher than SEMB.

However, there is portfolio country risk due to the different index weightings and also currency risk (getting paid in local currency versus converting this payment at the prevailing FX rate to USD or another external currency.

 

 

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