Fixed-income exchange traded fund investors who want yield may consider emerging market debt as some observers believe risks associated with a Federal Reserve interest rate hike have already been priced into the asset category.
According to Pacific Investment Management Co., emerging market bonds look attractive after valuations priced in a “a good chunk of risks” stemming from a rate hike, reports Ye Xie for Bloomberg.
“On balance, we believe emerging markets are well-positioned to weather the Fed tightening cycle,” Michael Gomez, head of emerging-market portfolio at Pimco, said. “Barring fresh bad news, we expect investors will look increasingly to EM for higher yield and carry, which should additionally support EM currencies.”
Emerging market debt has somewhat strengthened since the Fed’s announcement on Wednesday, but global investors are underweight emerging markets, which diminishes the risk of further selling, Gomez argued.
Previous Fed rate hikes have triggered volatility in the emerging markets. However, developing economies are more resilient now after governments bolstered foreign reserves to a tune of $7 trillion, switched away from U.S. dollars for funding and allowed currencies to float, Gomez added.
For fixed-income investors, emerging market debt may provide more attractive yield opportunities. For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) has a 6.95 year duration and a 5.37% 30-day SEC yield. The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) has a 7.89 year duration and a 6.00% 30-day SEC yield. The Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) has a 6.3 year duration and a 5.19% 30-day SEC yield. [Giving a Nod to Emerging Markets Bond ETFs]
In contrast, a similar duration Treasury bond ETF, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) has a duration of 7.61 years and a 2.03% 30-day SEC yield.
Additionally, local-currency emerging market bond ETFs have also produced some attractive yield opportunities. For instance, the iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB) has a 4.66 year duration and a 5.06% 30-day SEC yield. The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) has a 4.67 year duration and a 6.51% 30-day SEC yield. The actively managed WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) has a 5.15 year duration and a 5.91% 30-day SEC yield. [Higher Yielding Emerging Market Bond ETFs Are Outperforming]
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.