Currently, emerging market bonds on average provide 4.75% more yield than U.S. Treasuries. Additionally, emerging debt offers diversification qualities beyond the normal fixed-income assets.
“Based on returns and volatility over the last decade, allocating 19% of a global fixed-income portfolio to emerging market local currency bonds would have improved annual average returns by 200 basis points (2%), while reducing portfolio volatility by 100 basis points (1%),” according to TCW.
While some may associate “emerging” with greater risk, most of the underlying bonds in emerging market bond funds are investment-grade quality.
Some emerging market sovereign debt ETFs include:
- PowerShares Emerging Markets Sovereign Debt (NYSEArca: PCY). The ETF has a 4.03% 30-day SEC yield and a 0.50% expense ratio. PCY holds U.S. dollar-denominated emerging market debt.
- IShares JPMorgan USD Emerging Markets Bond (NYSEArca: EMB). The ETF has a 3.35% 30-day SEC yield and a 0.60% expense ratio. EMB holds U.S. dollar-denominated emerging market debt.
- Market Vectors EM Local Currency Bond ETF (EMLC). The ETF has a 5.12% 30-day SEC yield and a 0.47% expense ratio. EMLC holds emerging market bonds denominated in their local currencies, which are subject to currency risks.
For more information on fixed-income assets, visit our bond ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own EMB.