US$ yielding ETF from Cloud Atlas

In ETF Blog, Latest by Simon Brown

Cloud Atlas has issued a new ETF tracking African foreign currency bonds that will generate a US$ yield paid in Rands on the JSE – The African Sovereign Bond ETF.

The ETF invests in foreign currency bonds from eight African countries; Egypt (19.6%), Ghana (16.4%), Kenya (18.9%), Morocco (3.5%), Namibia (2.1%), Nigeria (20.6%), and South Africa (18.3%). All of which have sub-investment grade rating, in other words, junk status but all must be rated B- or above from all of S&P Global Ratings, Moody’s, and Fitch.

The current yield of the index is 7.66% and currency weakness against the US% will increase this yield. But one has to consider the risk of default. The issue is that a country that issues bonds in US$ is at risk of their home currency moving markedly weaker and that makes the debt more expensive to pay in that home currency. This risk is mitigated by the level of foreign currency held by the country so foreign currency reserves can manage the payments as the chart below shows only Namibia has any real risk here.

Total reserves as % of external debt 2019

Total reserves as % of external debt 2019

Further exports that generate foreign currency and remittances back home are significant in all cases reducing the risk further. As an example the chart below shows just how important remittances are as a source of foreign currency in Africa as people send hard currency back home.

Remittances are now 2x the level of FDI across Africa

Remittances are now 2x the level of FDI across Africa

Details

  • JSE code: ASBI
  • Target TER: 0.65%
  • Tax-free investing: Allowed


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