The fund expands Invesco PowerShares’ fundamental fixed-income line with the emerging market local currency sovereign debt portfolio.
PFEM is designed to provide investors fundamentals-weighted exposure to emerging market sovereign debt denominated in local currencies. The fund has an expense ratio of 0.50% and is expected to issue monthly distributions.
Emerging market sovereign debt represents an attractive asset class that can potentially offer higher yields and lower debt to gross domestic product ratios relative to most developed markets, according to Andrew Schlossberg, head of U.S. distribution and global ETFs at Invesco. “The portfolio is the first ETF to provide investors a fundamentals-weighted exposure to emerging market sovereign debt denominated in local currencies.”
Traditional bond indexes generally use some form of market-cap weighting, where constituent weights are a function of both the amount of debt issued and the debt’s current price. This approach can result in greater weights being assigned to issuers that have issued more debt. In contrast, the Fundamental Index approach developed by Research Affiliates LLC weights bonds based on each country’s economic footprint, resulting in a portfolio that is correlated to a country’s debt service capacity.
Weighting by fundamentals gives higher portfolio weights to issuers with lower leverage and better debt service capacity, resulting in generally lower credit risk compared with the cap-weight benchmark, according to Shane Shepherd, senior vice president and head of fixed-income research at Research Affiliates. “A regular rebalance back to fundamental weights takes advantage of potential market inefficiencies in credit spreads by buying cheaper bonds and selling more expensive ones,” Shepherd said.