The first Turkish bond ETF has been listed on the London Stock Exchange by the same company responsible for launching the first Indian bond ETF last year. However, with a similarly highly concentrated portfolio, the Turkish bond ETF could be a volatile holding for retail investors.
The LAM Alternatif ZyFin Turkey Sovereign Bond UCITS ETF (TRKY), which tracks the ZyFin Turkey Sovereign Bond Laddered Index, is comprised of six bonds with a range of maturities worth in excess of 100m lira. The bonds are selected from the full universe of Turkish Sovereign debt and divided into three groups, with each containing two bonds at a residual maturity of two, five and 10 years.
The ETF has been created by the same company behind the LAM Sun Global ZyFin India Sovereign Enterprise Bond UCITs ETF (CRRY), launched in December last year. That ETF was also made up of just six holdings, but these were Indian corporate bonds issued by state-owned enterprises. Unlike India, the majority of the Turkish bond market is made up of government bonds, accounting for 95 per cent of total outstanding Turkish debt.
With just six bonds comprising the index, the default risk attached to each is far more important than in a diversified index. The risk of investing in one country is already a higher-than-average strategy, particularly with a developing market such as Turkey. Other emerging bond ETFs tend to be diversified between countries and hold hundreds of bonds rather than less than 10.
The appeal of debt issued by countries such as Turkey and India is the relatively high yield on offer compared with debt issued by developed nations. The index tracked by TRKY was yielding 9.5 per cent at the end of May. Meanwhile, both regions are benefiting from increased international interest and liquidity. Turkey is now the sixth largest local currency bond market among emerging economies.
However, the high yields associated with emerging market debt are connected to the far higher risk profile of investing in these regions. Risks listed in the new ETF prospectus connected to emerging market bond investing include "precarious financial stability of issuers (including governments)", "lower trading volume and liquidity issues" and "political and economic instability". The fact that these bonds are denominated in local currency brings more problems if the currency weakens dramatically.
Turkey is a volatile market and has been hit by a spate of terror attacks in recent months following increasingly fraught clashes between Kurdish militants and Islamic State.
Rating agency S&P's local currency sovereign credit rating for Turkey is BBB- which is investment grade - a bond is considered investment grade if its credit rating is BBB- or higher. S&P upgraded Turkey's credit rating outllook from negative to stable in May.
Sanjay Sachdev, executive chairman of ZyFin, says forecasts indicate continued GDP growth of 3.5 per cent in 2016.
Push for yield and income ETFs continues A new breed of smart-beta ETFs designed to select the highest-yielding stocks and bonds have been growing in popularity and WisdomTree is now adding to a fast-growing subsection combining quality factors with income in a bid to cut out unsustainable dividend payers. The provider recently launched WisdomTree US Quality Dividend Growth UCITs ETF (DGRA) and WisdomTree Global Quality Dividend Growth UCITS ETF (GGRA). The ETFs focus on stocks with good dividend outlooks instead of selecting ones with the highest yields, which could be in line for dramatic share price falls rather than an increase in income. ETFs seeking quality income payers have been highlighted by commentators as an area to watch. Lyxor has already dipped its toe in this pool, having launched a range of Quality Income ETFs four years ago, which weight stocks in an index by quality and balance sheet, as well as historic dividend yield. The WisdomTree ETFs assess long-term earnings growth expectations to find the stocks with the best potential for increasing future dividends and then consider quality factors. WisdomTree uses three-year average return on equity (ROE) and return on assets (ROA) figures to determine how efficiently companies are generating profits. Income-focused ETFs track an index of stocks like other passive funds, but are using increasingly sophisticated and varied methods to find stocks and bonds likely to generate the highest income streams. This is appealing to investors in a low interest rate environment where yield is hard to find. |
