Companies in developing economies have been accumulating massive amounts of debt, adding to risks that emerging market bond exchange traded fund investors could face.
U.S. dollar-denominated emerging market bond ETFs have produced some attractive yield opportunities for fixed-income investors. For instance, the actively managed WisdomTree Emerging Markets Corporate Bond Fund (NasdaqGS: EMCB) has a 5.05 year duration and a 5.30% 30-day SEC yield. The SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF (NYSEArca: EMCD) comes with a 5.68 year duration and a 4.83% 30-day SEC yield. The iShares Emerging Markets Corporate Bond ETF (NYSEArca: CEMB) has a 5.24 year duration and a 5.03% 30-day SEC yield.
However, the asset class is not without its risks. For instance, JPMorgan warned that emerging market private sector debt has jumped by an “enormous” 33% of gross domestic product since the global financial crisis, which raises the risk of another financial crisis, reports Steven Johnson for the Financial Times.
JPMorgan analysts found that debt burdens of emerging market companies and households have surged 73% of GDP in 2007 to 106% at the end of 2014, which is near as high as in developed countries.
“In previous research, the IMF found that an increase in the ratio of credit to GDP of five percentage points or more in a single year signals a heightened risk of an eventual financial crisis,” Joseph Lupton, senior global economist at JPMorgan, told the FT. “Nearly half [of the EM countries analysed]have registered sustained increases at close to this amount over the entire period.”
The real concern comes as the U.S. Federal Reserve works on raising interest rates for the first time in almost a decade, which could diminish capital flows to emerging markets. Additionally, the strengthening dollar could also increase borrowing costs as a lot of emerging market debt loans are denominated in the USD.