PowerShares, the Wheaton, Il-based exchange traded fund issuing arm of Invesco Ltd, has launched the PowerShares Fundamental Emerging Markets Local debt Portfolio (PFEM).
The fund employs a fundamental strategy instead of the more traditional market capitalization weighted approach, and is linked to Rob Arnott’s Research Affiliates’ fundamental indexing methodology. PFEM will passively track the underlying index, but the benchmark is a kind of rules-based index that closely follows actively managed strategies.
The fund will track the Citi RAFI Bonds Sovereign Emerging Markets Extended Local Currency Index, which screens the underlying holdings based on four fundamental screens: a country’s population, GDP, land area and energy consumption. This investment approach breaks the link between portfolio weight and under- or over-valuation, creating the potential for a more efficient portfolio, claims the fund manager.
The fund will generally invest 80 percent of total assets in emerging market bonds that comprise the index. The portfolio and the index constituents are weighted and re-balanced quarterly in January, April, July and October based on each country’s overall ranking across various fundamental indicators.
The underlying benchmark includes bonds issued by 18 governments that include Brazil, Chile, China (offshore), Colombia, the Czech Republic, Hungary, Indonesia, Israel, Malaysia, Mexico, Peru, the Philippines, Poland, Russia, South Africa, South Korea, Thailand and Turkey. To be included in the index, a country’s domestic sovereign rating must be at least Ca by Moody’s Investors Service or CC by Standard & Poor’s.
You should bear mind that since PFME invests in government bonds of emerging market countries, much of the income received will be in foreign currencies. However, since the fund’s NAV is calculated in US dollars, returns could decline if the US dollar strengthens against the relevant foreign currencies. The fund may be forced to liquidate securities in order to make distributions if the fund falls short of cash in US dollars to meet monthly distribution requirements.
PFEM has an annual expense ratio of 0.5 percent.
Disclosure: No holdings
Contact Ulli