Franklin Templeton’s Latest ETF Taps ‘Booming’ Emerging Markets Debt
The asset manager’s latest ETF gives investors exposure to debt tied to foreign countries.
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They don’t call them emerging markets for nothing.
Funds tracking foreign markets have been on fire of late. Emerging-market debt was the strongest performer in the bond market for both the fourth quarter and last year as a whole, according to Morningstar. This month, Franklin Templeton launched a new fund designed to capitalize on the trend, the Templeton Emerging Markets Debt ETF (TEMD), which combines exposure to US dollar-denominated and local currency-denominated debt. Still, whether their strong performance will continue remains an open question.
“It’s not a very big space, but it’s growing,” said Aniket Ullal, head of ETF research and analytics at CFRA, adding that there’s about $34.2 billion in emerging market bond ETFs. “If you look at flows this year, they’ve been pretty moderate.”
Circle of Life
TEMD will maintain at least half of its allocation to USD- and Euro-denominated debt securities, or obligations that have to be paid back in dollars or Euros rather than local currencies, said Dave Mann, head of ETF product at the firm. This strategy could lead to higher yields and total return potential, he added. “These markets are really setting the pace when it comes to things like semiconductors and electric vehicle batteries,” Mann said.
Still, emerging markets tend to be more cyclical in terms of investor appetite, said Ullal. “Investors are willing to take on more risk in the current environment, and emerging market debt is part of that story,” he added.
Some of the best-performing funds that capitalize on emerging markets include:
- The Vanguard Emerging Markets Stock Index Fund ETF (VWO), which is up 5% YTD.
- The Avantis Emerging Markets Equity ETF (AVEM), which is up 7% YTD.
- The Freedom 100 Emerging Markets ETF (FRDM), which is up 12% YTD.
A Dollar Short. Other supporting factors for the strategy include the weakening dollar, which has fallen to its lowest level in years, as well as specific outperforming markets in the Asia-Pacific region, Mann said. “The dollar weakening again… is certainly part of the considerations of this strategy,” he added. “Everyone’s looking at the performance in some of these emerging markets, something like Korea [or] Taiwan. These markets are booming.”
