It’s likely that a few factors have contributed to this trend. Clearly there’s been a shift toward riskier assets in general as yield-starved investors strive to meet income objectives. Also, we’ve seen a marked increase in the number and variety of EM bond ETPs available. There are now 57 of these products listed globally, 11 of which were launched this year. Many of the new funds provide increased choice within the category – segments like EM corporate and EM high yield bonds.
And perhaps investors are just getting more comfortable with emerging market bonds. Given that many people look to fixed income for its relative stability, it’s understandable that the shaky governments and economies implied by the term “emerging markets” can be a deal-breaker. However, the problems of the developed world and the slowdown of global growth have begun to cast some of these countries in a new light.
In addition, the characteristics of EM debt have evolved over time. Investors are starting to realize that concerns about volatility and the risks of developing economies may be less than many perceive. For example, 88% of the bonds in the Barclays EM Local Currency Government Index are rated investment grade. Debt-to-GDP ratios are low for many EM countries relative to developed market counterparts. And, EM debt has exhibited low correlations to other asset classes and high historical Sharpe ratios relative to other fixed income segments.
Will we continue to see an upward trend in EM bond ETPs? If the prolonged low interest rate environment persists (and we think it will), we expect to see more investors considering these products as a potential source of yield. In addition, the relatively positive risk/return characteristics and low historical correlations to other segments of the fixed income market should continue to make this category one to watch.
Dodd Kittsley, CFA, is the Head of Global ETP Market Trends Research for BlackRock.