Emerging market bond ETFs were standout performers in the fixed-income space this year and the trend could continue next year as investors take on more risk in search of yield.

The iShares JPMorgan USD Emerging Markets Bond (NYSEArca: EMB) is up about 16% year to date. EMB has been one of the top-selling ETFs in the second half of 2012, raking in over $2 billion, according to IndexUniverse data.

As a group, emerging market bond ETFs have attracted over $6 billion this year. [Finding the Best ETFs for Emerging Market Bonds]

“If the prolonged low interest rate environment persists (and we think it will), we expect to see more investors considering these products as a potential source of yield,” said Dodd Kittsley, an ETF analyst at BlackRock’s iShares, in a recent commentary. “In addition, the relatively positive risk/return characteristics and low historical correlations to other segments of the fixed income market should continue to make this category one to watch.” [Investors Sweet on Emerging Market Bond ETFs]

Other ETFs for the sector include PowerShares Emerging Markets Sovereign Debt (NYSEArca: PCY) and Market Vectors EM Local Currency Bond ETF (NYSEArca: EMLC). [Emerging Market Bond ETFs: Looking Overseas for Yield]

“Emerging markets have an average debt-to-GDP ratio of 35% versus 100% for developed nations in Europe, Japan and the U.S. On top of that, they hold roughly 66% of all foreign currency reserves,” says Josh Brown at The Reformed Broker blog.

“EM nations have triple the fundamentals of the developed world, burgeoning ranks of middle class consumers … and yet they offer much better return potential, with higher yields and a less crowded playing field,” he added.

iShares JPMorgan USD Emerging Markets Bond

Full disclosure: Tom Lydon’s clients own EMB.

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