iShares JP Morgan USD Emerging Markets Bond AUD Hedged ETF

Risk Classification: 4 – Aggressive

Price per Unit (1 Apr 16): 103.48 [AUD]

Dividend Yield: NA

Expense Ratio: 0.51%

Please refer prospectus for detailed risk disclosure

Investment Rationale:

This ETF broadly tracks the Emerging markets credit investing in high yield bonds and investment grade bonds. It mainly has exposures to government and govermnet related entities. Hence it is riskier than ETFs investing in investment grade bonds as it is exposed to higher credit risk issuers. The ETF primarily invests in USD denominated securities and provides an AUD hedged version via a currency swap overlay.

Emerging Markets has been positively correlated with commodities asset class as the region as a whole is an exporter of commodities. Due to slowdown in China, the commodities space has underperformed due to slowdown in demand for commodities. However, we feel that there is a cleansing process underway in commodities where supply adjusts to lower demand as higher cost and more levered producers go out of business. The prices will recover over the medium term as demand picks up again. EM credit asset class is an attractive way to play the recovery as the index tracking will ensure that your capital is invested into the survivors of this process. As the commodity prices recover these investments will outperform.

We feel, the WTI crude price will range between US$30.00 to US$40.00 per barrel. There will be periods of volatility in crude price in 2016. It is more prudent to buy EM Credit ETF when crude prices are closer to US$30.00 to ensure an attractive entry price.


EM as a region needs capital for investment into infrastructure and capital spending. This creates a favorable market for EM issuers to raise capital and we have seen good returns from this asset class. Although we see near-term headwinds from China due to rapid debt build-up in the corporate sector, overall we feel that this is not enough to cause a systemic risk event. Valuations are attractive.

Below Chart Shows the EM Credit Spread Index:

em credit spreads

Fundamental Risk to investment:

This ETF will sharply sell off in the event of a sharp widening in credit spreads in EM credit and/or a sharp sell-off in US Treasuries. Neither are base case expectations, although we do expect volatility in EM spreads. Hence a more prudent strategy is to buy dips, tracking crude oil prices.

Details of ETF:

Details on iShares website – For Live data and Prospectus


IHEB AU comp