The fiscal health of developing countries versus the those in the west makes investing in their sovereign debt a more attractive proposition, particularly given the substantial risk premium still offered, Pimco added.
Chris Getter, senior vice president and emerging markets product manager at Pimco, said it had launched the Emerging Markets Local Currency Bond Advantage ETF, along with Source, because of the strong fundamentals behind these countries’ economies.
China, for example, has a government debt to GDP ratio of around 15%, while the eurozone average is around 90%.
EM debt also gives diversification in the fixed income space and could offer resilience in the face of a worsening sovereign debt crisis in the eurozone.
To gain even better yields the Pimco Source EM ETF invests in local currency denominated debt, rather than dollar denominated, which translates to a yield of approximately 7% rather than 6.5%.
Getter admitted that since the beginning of September some investors have withdrawn from emerging markets as they have decided to take risk off the table.
But he added that in the last week, people who have experienced significant losses in other parts of their portfolios have begun to re-risk as they recognise the investment case for emerging markets is still strong over the long term.
Michael John Lytle, co-founder and managing director of Source, said investors are increasingly viewing local currency exposure as the "plain vanilla" way to access EM, as they have come to realise they are bigger and deeper than dollar denominated markets.
"If you’re a local, domestic investor you are born, resident and going to die in that country and you have a different perspective. You are there all the time, rather than selling out every time there’s trouble."
Emerging market currencies are also historically undervalued and leaders in these countries have started to allow some controlled appreciation as their markets try to become more consumer and less export focused.
An appreciation in the local currencies will increase gains within the ETF.
IMF data published in April 2011 for forex rates as at 31 December 2010, showed the Chinese remninbi to be 40% undervalued, while the Japanese yen was almost 40% overvalued and the Swiss Franc was 80% overvalued.
The Pimco Source EM Advantage ETF’s defining feature is that its index uses a unique GDP weighting methodology.
This means the index focuses on national income and the country’s capacity to repay debt and avoids using the market cap bias of indices used by similar products.
As a result the index offers a natural overweight to less indebted countries and provides the access to Chinese and Indian markets that investors expect from an emerging markets product.
In countries such as India, Russia and China where buying local bonds is impractical or inefficient, the Pimco Source product uses non-deliverable forwards.
The management fee is 0.60% and the fund is Ucits III compliant.
