While many may associate emerging markets with greater risks, investors should be comfortable with the relatively improved credit quality of emerging market issuers. According Bank of America Merrill Lynch, over 90% of emerging-markets sovereign debt was rated below investment-grade in 1998, but that number is now less than 40% as of March 2015, Ricardo Adrogué, head of emerging-markets debt, and Brigitte Posch, head of emerging-markets corporates, for Babson Capital Management wrote on InvestmentNews.
“With interest rate and economic cycles that vary from developed markets, investments in emerging markets can potentially offer low correlations with some of the asset classes that financial advisers typically manage on behalf of their clients,” according to the analysts.
Along with their diversification qualities, investors will also enjoy higher yields from emerging market debt assets. Emerging sovereign and local-debt index yields are at about 6.4% and 5.4%, respectively, whereas the yield on 10-year Treasuries is hovering around 2.13%.
Nevertheless, investors should be aware of the potential risks, including geopolitical risks and corporate governance issues. Moreover, emerging debt can be disproportionately affected by currency and interest rate changes.
For more information on the fixed-income space, visit our bond ETFs category.
Max Chen contributed to this article.