The Case for Emerging Market Bond ETFs | ETF Trends

The high-and-low hunt for yield has led many an investor to look at emerging market bond exchange traded funds (ETFs). Yield isn’t the only thing to like about them, though.

  • There’s a lot of concern about the balance sheets of developed countries – Ireland, Greece, Spain, Italy, anyone? The balance sheets of developing countries are in better shape. To wit: total emerging market government debt less than 50% of GDP, on average. It’s more than 100% of GDP for the United States, Europe and Japan, says Forbes.
  • But yes, there’s that yield. Sovereign emerging market debt is paying around 3% more than the current yields on 10-year U.S. Treasury notes. [Behind the Rush for Emerging Market Bond ETFs.]
  • And then there’s that diversification. A good way to limit damaging effects of inflation on U.S. bonds is to invest in funds that diversify across emerging markets.

Still, you shouldn’t forget that emerging markets have a higher default rate in recent years. If you’re going to strike out on your own, you should also examine the country’s macroeconomics, banking system, economic growth and exchange rates.

If you want to take the plunge with ETFs instead, you’ll get a diversified mix of emerging market bonds. The funds below give exposure to different countries at different weights; to see how they’re allocated and the current yield, click the ticker symbol:

  • iShares JP Morgan USD Emerging Markets Bond Fund (NYSEArca: EMB)
  • PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY)
  • Market Vectors Emerging Market Bond ETF (NYSEArca: EMLC)
  • WisdomTree Emerging Markets Local Debt (NYSEArca: ELD)

For more information on the emerging markets, visit our emerging markets category.

Max Chen 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.