Why Emerging Market Bond ETFs Could Stay Hot in 2013

December 28th at 3:40pm by John Spence

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.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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