Emerging market bond exchange traded funds can potentially enhance an investment portfolio’s returns through income and capital appreciation, along with diversifying away from an overweight U.S. exposure.
On the recent webcast, The New Worlds of Emerging Markets Bonds, Francis G. Rodilosso, senior investment officer and portfolio manager for Van Eck Global, explains that the emerging market bond universe has significantly evolved over the past few decades and accumulated about $2.89 trillion in assets. Consequently, the asset class can offer investors a diverse universe of country, currency, credit and maturity choices.
“Emerging markets bonds have evolved significantly over the past 20 years, growing in size, diversity and liquidity,” Ed Lopez, Marketing Director for Van Eck Global, said.
As the moniker for the developing world suggests, emerging markets still have room to grow. While the countries’ markets have evolved over the years, the economies are still maturing.
“Both EM equity an EM fixed income markets appear small in size relative to emerging markets contribution to global Gross Deomstic Product, leaving room for possible growth,” Eric Fine, managing director and portfolio manager at Van Eck Global, said.
Some investors, though, may be put off by currency risk associated with the emerging markets. However, Fine explains that emerging countries have allocated high reserves, which help provide greater flexibility and better protection to their economies. Additionally, the strong economic growth, lower inflation and lower relative currency volatility has helped expand the local currency bonds market.
Investors traditionally accessed emerging market debt through U.S.-dollar-denominated offerings. However, more are turning to the growing local currency bonds market.
For instance, the Market Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM), which has a 7.15% 30-day SEC yield, targets USD-denominated speculative-grade emerging-market bonds. Consequently, the ETF negates the effects of currency risks. The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC), which has a 4.16% 30-day SEC yield, tracks emerging market bonds denominated in the local currencies, or in the currency of the issuing country, which may expose investors to currency risks.
The broad Market Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG), which has a 4.51% 30-day SEC yield, includes a combination of U.S. dollar-, euro- and local currency-denominated bonds.
Alternatively, investors can include targeted exposure with the Market Vectors Renminbi Bond ETF (NYSEArca: CHLC), which has a 2.69% 30-day SEC yield. CHLC tracks Chinese Renminbi-denominated bonds.
“EM high yield corporate bonds can be a complement to other fixed-income and equity asset classes,” Rodilosso said. EM high yield corporate bonds, though, have been “historically more volatile than U.S. high yield markets, but has offered differentiated yield and return potential.”
Financial advisors who are interested in learning more about investing in emerging market bond ETFs can listen to the webcast here on demand.