Van Eck last Thursday (5/12/11) launched the Market Vectors LatAm Aggregate Bond ETF (BONO), claiming it is the first U.S.-listed ETF offering exclusive exposure to Latin America’s debt markets. The new ETF will try to replicate the BofA Merrill Lynch Broad Latin America Bond Index using a 4% sampling technique.
The underlying index is composed of external and local currency Latin American sovereign debt, and the external debt of non-sovereign Latin American issuers denominated in USD or Euros. The index consists of debt that is 64.3% sovereign issued, 33.8% corporate, and 1.9% quasi-governmental.
When buying a foreign debt fund, investors want to know the issuers, quality, yield, and currency exposure of the overall fund. Van Eck fails on half of these items by providing no indication regarding the yield or currency exposure (summary page).
The marketing literature fails to supply the currency exposure of either the fund or the index. However, the downloadable spreadsheet of holdings supplies the currency on a bond by bond basis. With some effort, I modified the spreadsheet to determine that 40.8% of the fund is currently denominated in four foreign currencies. However, shareholders should not be forced to perform these types of calculations. Data of this nature should be calculated and supplied by Van Eck. Currency exposure isn’t even identified as one of the risks on the fact sheet(pdf).
Index characteristics include a 7.3% yield and an average modified duration of 5.75 years for the 453 issues in the index. However, the fund only holds 18 issues, and the actual fund characteristics are all designated “n.a.” on the website. If the Van Eck sampling process accurately replicates the index with just 4% of the issues, then investors might expect a yield in the neighborhood of 6.8% after BONO’s 0.49% expense ratio reduction.
Country exposure for the fund (not the index) is currently at 27.0% for Brazil, Mexico 26.5%, Colombia 11.6%, Cayman Islands 8.8%, Venezuela 6.3%, Argentina 4.0%, U.S. 3.2%, Chile 2.9%, Peru 2.3%, Panama 1.6%, and others 5.7%. Therefore, issuers from countries that have not yet achieved “emerging market” status are eligible for inclusion. Another risk not identified in the marketing materials that potential investors should consider.