When it comes to fixed income investing, sometimes it pays to travel abroad. Emerging market debt focused exchange traded funds are offering opportunities to areas of the market that were once difficult to access.
“Emerging markets have increased political and economic risks that make them more susceptible to default. For this increased risk, investors get higher relative yields. As with any fixed-income product, investors need to be mindful of the yield offered and how that compares with their expectations for inflation over the long run,” Timothy Strauts wrote in a recent fund analysis on Morningstar. [What are ETFs? – Diversified Bond Funds]
Most investors are lacking emerging market debt or are underweight for this asset class within their portfolios. Focused ETFs such as the WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) or the iShares Emerging Markets Local Currency Bond Fund (NYSEArca: LEMB) give exposure to emerging market government-issued bonds. [Bond ETF Ideas for Higher Yields]
Russ Koesterich for the iShares blog gives us four reasons investors should favor this fixed income asset class:
- Emerging markets came out of the financial crisis in better fiscal shape than developed counterparts. The average debt burden of emerging markets is less than 40% of gross domestic product, while developed market debt has soared to more than 100% of GDP on average. For this reason, emerging market bonds should be less volatile than those from developed nations.
- Inflation seems to be less of a looming burden in most emerging economies, with the exception of India. The IMF predicts that the inflation risk from 2011 in emerging countries will continue to wane throughout this year.
- Emerging market bonds are offering a significant premium over most developed market debt. Currently, emerging market bonds are yielding roughly 350 basis points over the 10-year Treasury, close to a record high.
- Emerging market bonds are a hedge on the U.S. dollar, while adding portfolio diversification. For those investors that want to avoid foreign currency risk, there are ETFs that offer yields without the added exposure. [Emerging Market Currency ETFs]
WisdomTree Emerging Markets Local Debt Fund
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.