Thanks to a widening budget crisis in Europe, sovereign debt has gotten a bad reputation. There are other countries that are on much more solid ground and you can get exposure to a number of them by using emerging market debt exchange traded funds (ETFs).
There are two ETFs that buy emerging market sovereign debt: PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) and the iShares JP Morgan USD Emerging Markets Bond Fund (NYSEArca: EMB).
PCY has attracted $590 million in assets. Its holdings’ effective duration is just under eight years. 45% of the ETF is rated BBB and 27% rated BB, and it yields about 6%. Indonesia and the Philippines have the largest positions, at 5%, while other economies, such as Uruguay, are not given as much exposure. [Why It’s the Age of Emerging Markets.]
EMB at $1.4 billion in assets. Its effective duration is seven years. 22% of the fund is rated BBB-plus, 12% is BBB-minus and 11% is BB-minus. It yields 5%, and countries such as Russia, Brazil, Turkey and Mexico are allocated at 9% each [The Case for Emerging Market Banks.]
Apparently, the European Commission’s closely watched Economic Sentiment Indicator (ESI) of the 16-member eurozone rose to 98.7 from 98.4 in May amid hopes that the euro’s slide would underpin the currency bloc’s export machine and consequently help to power economic growth, reports Andrew McCathie for Earth Times. Will this pattern hurt emerging markets even more, as the pattern continues?
The major concerns about emerging market sovereign debt is that currency devaluation becomes problematic for a country with a lot of foreign debt outstanding, explains Roger Nusbaum for The Street. So far, market conditions support a background for the emerging market currencies to do well against the U.S. dollar. [How to Use Currency ETFs.]
For more stories about emerging markets, visit our emerging markets category.
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.