Fixed-income investors are concerned about the potential negative effects of a rising rate environment. Nevertheless, emerging market debt and bond-related exchange traded funds can provide attractive opportunities.
“It’s always hard to know exactly where to put your money these days given how rates and spreads are so low, but on a relative basis we still think there’s value in EM debt,” Matt Tucker, head of the iShares fixed income strategy team, said, reports Lawrence Delevingne for CNBC.
For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) both track U.S.-dollar-denominated emerging market bonds. [Considering Your Emerging Market Bond ETF Options]
Patricia Oey, a senior analyst at Morningstar, argues that investors can diminish volatility, notably currency risk, through USD-denominated bond ETFs. The U.S. dollar has been appreciating against a basket of foreign currencies as traders strengthen the greenback ahead of a potential Federal Reserve rate hike. With a USD-denominated bond ETF, investors will not have to worry about the negative effects of depreciating emerging market currencies.
Looking at the developing countries, fixed-income assets provide a way to access their expanding economies
“Their economies are actually growing more than other economies, their quality rating is higher, the debt to GDP is much lower than the industrialized world. And their yields are higher,” Brian Evans, who runs ETF bond portfolios at Madrona Funds, said in the CNBC article. “All in all, that’s an opportunity. That’s called buying low.”
Despite being associated with riskier developing economies, emerging market bond ETFs include high-quality debt. For instance, EMB tracks investment-grade bonds, including a 3.9% weight in AA-, 2.0% in A+, 0.5% in A, 8.4% in A-, 9.2% in BBB+, 11.7% in BBB and 20.1% in BBB-. PCY also tracks 4% AA-rated bonds, 17% A and 44% BBB. [Asian Bond ETFs Could be Vulnerable]
Additionally, the bond ETFs offer attractive yields, with EMB showing a 4.36% 30-day SEC yield and PCY showing a 4.74% 30-day SEC yield. In contrast, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), which has comparable durations as the two emerging market bond funds, comes with a 2.25% 30-day SEC yield.
“It’s really attractive on a short-term income basis relative to alternatives and…the long-term prospects with demographics relative to the developed world and the sort of metrics that you would expect to generate improving economies,” Josh Barrickman, head of bond indexing at Vanguard, said in the article.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article. Tom Lydon’s clients own shares of EMB.