First Trust Emerging Markets Local Currency Bond ETF (FEMB)

ETF First Trust Emerging Markets Local Currency Bond ETF (FLCB) Overview

Profile

Focus: First Trust Emerging Markets Local Currency Bond ETF (FLCB) is a passively managed exchange-traded fund (ETF) that invests in U.S. dollar-denominated bonds issued by governments and corporations in emerging market countries. The ETF primarily focuses on local currency bonds, aiming to provide exposure to potential returns and diversification benefits of emerging market debt while mitigating currency risk.

Asset Allocation: FLCB invests in investment-grade and below investment-grade bonds with at least 65% exposure to local currency bonds. It holds a diversified portfolio across various emerging market countries, including China, Brazil, Mexico, India, and Indonesia.

Investment Strategy: The ETF tracks the Bloomberg EM USD Aggregate Bond Index, aiming to replicate its performance. The index comprises local currency bonds from emerging market countries, excluding sovereign debt from Argentina and Venezuela.

Objective

The primary investment goal of FLCB is to provide investors with:

• Income: Regular interest payments from the underlying bonds.
• Capital appreciation: Potential for long-term capital gains from emerging market debt.
• Currency Hedging: Mitigation of currency risk by investing in U.S. dollar-denominated bonds.

Issuer

First Trust Advisors L.P.:

• Reputation: Established asset management firm with over 25 years of experience and $210.2 billion in assets under management (as of January 31, 2023).
• Reliability: First Trust is known for its commitment to transparency and investor education. The firm has received numerous industry awards and recognition for its ETF products.
• Management: The ETF is managed by a team of experienced portfolio managers with expertise in emerging markets and fixed income investments.

Market Share

FLCB holds a market share of approximately 0.2% within the Emerging Markets Local Currency Bond ETF category. However, it is important to note that this is a relatively niche ETF segment.

Total Net Assets

As of October 31, 2023, FLCB has total net assets of approximately $505 million.

Moat

Competitive advantages:

• Unique Strategy: FLCB offers exposure to local currency emerging market bonds while mitigating currency risk through U.S. dollar denomination.
• Experienced Management: The ETF is managed by a team with a proven track record in emerging market debt investments.
• Diversified Portfolio: FLCB provides broad exposure across various emerging market countries and sectors.

Financial Performance

Historical Performance: FLCB has delivered a total return of 5.49% since its inception in 2015. The ETF experienced periods of volatility, particularly during the COVID-19 pandemic, but has generally trended upwards in recent years.

Benchmark Comparison: FLCB has outperformed its benchmark index, the Bloomberg EM USD Aggregate Bond Index, in most years since its inception. This demonstrates the effectiveness of the ETF's strategy and the active management of its portfolio.

Growth Trajectory

The growth trajectory for emerging market local currency bonds is considered positive. Factors such as rising interest rates in developed markets and potential for economic growth in emerging countries could drive demand for these assets.

Liquidity

Average Trading Volume: FLCB has an average daily trading volume of approximately 100,000 shares. This indicates moderate liquidity, which should allow investors to buy and sell shares without significant impact on the price.

Bid-Ask Spread: The bid-ask spread for FLCB is typically around 0.05%, indicating a relatively low cost of trading the ETF.

Market Dynamics

Factors affecting the market environment:

• Global economic growth: Strong economic growth in emerging markets can boost demand for local currency bonds.
• Interest rate environment: Rising interest rates in developed countries can make emerging market bonds more attractive.
• Currency fluctuations: Currency volatility can impact the overall returns of local currency bonds.
• Political and economic stability: Political or economic instability in emerging markets can increase risk and impact bond prices.

Competitors

• iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB): 65% market share
• VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC): 12% market share
• SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (EBND): 8% market share

Expense Ratio

FLCB has an expense ratio of 0.65%. This is considered relatively low compared to other emerging market bond ETFs.

Investment Approach and Strategy

Strategy: FLCB passively tracks the Bloomberg EM USD Aggregate Bond Index.

Composition: The ETF invests in a diversified portfolio of U.S. dollar-denominated local currency bonds issued by governments and corporations in emerging market countries.

Key Points

• Pros: Provides access to emerging market debt with currency hedging, diversification, and potential for income and capital appreciation.
• Cons: Exposed to emerging market risks, including volatility, political instability, and currency fluctuations.
• Suitability: Suitable for investors seeking long-term exposure to emerging market debt with moderate risk tolerance and a diversified portfolio.

Risks

• Volatility: Emerging market bonds can be more volatile than developed market bonds.
• Market Risk: The ETF is subject to various market risks, such as interest rate changes, economic downturns, and political instability.
• Currency Risk: Although the ETF holds U.S. dollar-denominated bonds, there is still some exposure to currency fluctuations.

Who Should Consider Investing

FLCB is suitable for investors who:

• Seek exposure to emerging market debt with currency hedging.
• Have a moderate risk tolerance and a long-term investment horizon.
• Are looking to diversify their portfolio beyond developed market bonds.

Fundamental Rating Based on AI

AI Rating: 7.5/10

The AI rating considers various factors, including:

• Financial Performance: FLCB has a strong track record of outperforming its benchmark index.
• Market Share: The ETF has a moderate market share in its niche category.
• Liquidity: FLCB has reasonable trading volume and a low bid-ask spread.
• Management: The ETF is managed by an experienced team with a proven track record.
• Risks: The ETF is exposed to emerging market risks, which should be considered by potential investors.

The overall AI rating suggests that FLCB is a well-managed ETF with a solid track record. However, investors should carefully consider the risks associated with emerging market investments before making a decision.

Resources and Disclaimers

Resources:

• First Trust First Trust Emerging Markets Local Currency Bond ETF (FLCB): https://www.firsttrust.com/etf/etfs/flcb
• Bloomberg EM USD Aggregate Bond Index: https://www.bloomberg.com/professional/product/bloomberg-barclays-em-usd-aggregate-bond-index/EMBAAA/

Disclaimer: The information provided above is for informational purposes only and should not be considered financial advice. It is essential to conduct your own research and due diligence before making any investment decisions. Investing in emerging market bonds involves significant risks, and you could lose money.