Martin Lee @ Sg
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iShares Asia Local Currency 1-3 Year Bond Index ETF

The iShares Asia Local Currency 1-3 Year Bond Index ETF was listed on SGX on 8th December 2011 last week.

The investment objective of iShares Barclays Capital Asia Local Currency 1-3 Year Bond Index ETF is to provide investment results that, before fees and expenses, closely correspond to the performance of the Barclays Capital Asia Local Currency Short Duration Bond Index in US dollar terms.

Being short duration bonds, the average yield to maturity is expected to be low, in the region of 2-4+%.

The ETF has a management fee of 0.35% p.a with a fund size of about US$9 million and uses sampling replication.

Even though the ETF is denominated in USD, the currency exposure of an investor of the ETF is really in the local currencies of the underlying Asian bonds. These include (as of 13th December 2011):

Thailand 25.15%
South Korea 24.93%
Malaysia 23.15%
Singapore 16.40%
Indonesia 4.98%
Philippines 4.02%
Hong Kong 1.38%

The returns of an investor would come from the bond returns as well as any gain or losses in the local currencies.

To give an example of why you are not exposed to the currency that an ETF is denominated in, say you have an ETF that invests into S$130 million worth of Singapore bonds. With 100 million shares, each share is worth US$1 (at an exchange rate of US$1 to S$1.30) and would have cost you S$1.30.

Assume that the value of the Singapore bonds remain unchanged but USD depreciates to US$1 to S$1. If the value of the ETF still remains at US$1, then yes, your shares would only be worth S$1.

However, the S$130 million worth of bonds should now be valued at US$130 million as the exchange rate is 1 is to 1. This means that each share would be worth US$1.30, a 30% appreciation in price. Valued in S$, your shares would still be worth S$1.30.

The main disadvantage of having a US$ denominated ETF is the spread you incur (through your bank or brokerage firm) every time you buy or sell the ETF.

You can find out more product information about this bond ETF here:

iShares Barclays Capital Asia Local Currency 1-3 Year Bond Index ETF

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