When trading in the emerging market space, equity exchange traded funds (ETFs) are usually the go-to investment. However, the market for emerging market debt is steadily rising and may be a viable alternative to investing in emerging economies.
Fixed-income assets are legal, contractual obligations for the issuing entity to pay a creditor a stated rate of interest and the full principal invested over a specified time, which makes them less risky than equities, Katrina Lamb for Investopedia instructs.
Emerging markets offer a mix of sovereign, municipal, corporate and structured debt in either local currency issues or issues denominated in U.S. dollars or another developed currency.
If you want exposure to this space, you have a growing number of options.
Investors may access emerging market debt through the iShares JP Morgan USD Emerging Markets Bond Fund (NYSEArca: EMB) or the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), writes Roger Nusbaum for TheStreet. Both EMB and PCY hold bonds denominated in U.S. dollars.
Which bond you choose really depends on which countries you’re looking for exposure to.
EMB has 64 holdings and a 0.60% expense ratio. The top country weightings, according to the ETF Resume, are Brazil, Turkey, Mexico, Philippines, Indonesia, Venezuela and Colombia.
PCY, on the other hand, has 55 holdings and a o.50% expense ratio. Top countries include Uruguay, El Salvador, Russia, Turkey, Colombia, Indonesia and Poland.
A third option is the recently-launched Market Vectors Emerging Market Bond ETF (NYSEArca: EMLC), which provides access to bonds denominated in currencies of the issuing countries. EMLC includes country weightings from 3% to 10%. Brazil, Malaysia, Mexico, Poland, South Africa and Thailand each make up 10% while Indonesia and Turkey hold 8% weightings. EMLC has an expense ratio of 0.49%. According to Van Eck’s research, EMLC has a 0.76 correlation to U.S. equities and a 0.54 correlation to U.S. bonds.
For more information on international sovereign debt, visit our international Treasury bonds category.
Max Chen contributed to this article.