With the financial meltdown and credit crisis, the risk of defaulting on debt obligations has ballooned and established an appetite for risk for some emerging market bond exchange traded funds (ETFs).

In fact, the cost to insure against the U.S. government from defaulting has skyrocketed to 0.6% from 0.08% earlier this year and the cost to insure against individual emergers from defaulting is anywhere from 3% to 7%, states Gary Gordon of ETF Expert.  Even with these high costs, there appears to be promise in emerging market bond ETFs.

For those who don’t know, bond ETFs differ from equity ETFs in several ways.  Bond ETFs track indexes that contain individual bonds, they don’t have a face value or coupon rate, instead their prices are determined by the face value of the individual bonds in the index that the ETF tracks, and they have a yield that equals the average interest rate of the bonds in the index that the ETF tracks.

Two bond ETFs some appear to be taking a look at are:

  • PowerShares Emerging Sovereign Debt Fund (PCY): down 23.2% year-to-date

  • iShares JPMorgan Emerging Market Bond Fund (EMB): down 14.6% year-to-date

Both of these ETFs are hovering around their trendlines and yield close to 7%, which could be appealing if you want to take a ride on the risk rollercoaster.

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.