PowerShares Emerging Markets Sovereign Debt Portfolio
The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) invests in U.S. dollar-denominated debt of emerging market governments including Pakistan, Korea and Eastern European countries such as Poland, Romania, Lithuania and Hungary. PCY has $2.48 billion in assets, an expense ratio of 0.5% and a current yield of 4.8%.
Pros: Emerging-market bond ETFs were one of the asset-class stars last year, delivering a one-year return of nearly 11.5%. The growth potential of emerging markets has driven gains, and credit ratings actually have been improving in many emerging-market countries in recent years.
Cons: PCY’s emerging-market bonds tend to be riskier than U.S. debt. Also, nearly 87% of PCY’s holdings are rated BBB or below; more than half of that total is non-investment grade (BB or below). Emerging market bonds have been particularly pummeled by word that the Fed could scale back quantitative easing. As a result of the adverse market, several emerging-market bond auctions — most recently in Romania — have been scrapped.
Verdict: PCY is the classic risk-reward scenario — it’s not best suited for risk-averse investors with a short investment horizon, and volatility is par for this course. That said, it can play a valuable role as a small part of a well-diversified portfolio.