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ETF Specialist

Sizing Up a Pair of Emerging-Markets Debt ETFs

The classic battle between market-cap-weighting and equal-weighting unfolds in the bond ETF arena.

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Just as with equity exchange-traded funds, the Morningstar Analyst Rating is a useful input into investors’ selection process when choosing among fixed-income ETFs. To demonstrate the rating’s utility, I will compare two emerging-markets bond ETFs: Bronze-rated  iShares JP Morgan USD Emerging Markets Bond ETF (EMB) and Neutral-rated PowerShares Emerging Markets Sovereign Debt ETF (PCY).

The emerging-markets bond Morningstar Category is relatively new territory for index funds. These two funds represent very different approaches to indexing: One weights bonds based on market capitalization, while the other weights them equally. Analyzing the attributes of each approach will help to illustrate how our ratings methodology and process come to life. This example shows the degree to which our assessment of index-tracking funds is driven by the methodologies of their underly­ing indexes—which drive the process via which they construct their portfolios.

Phillip Yoo does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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