It has been a while since emerging markets exchange traded funds could be deemed attractive. At least that has been the case on the equity side, but investors may find compelling opportunities with emerging markets bond ETFs.
The iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) are two of the largest emerging markets sovereign debt ETFs. EMB tracks U.S. dollar-denominated emerging market government bonds across more than thirty countries. PCY also holds a portfolio dollar-denominated debt.
While many emerging markets have garnered a bad reputation for experiencing spiraling debt defaults in face of rapid currency depreciation, the developing economies are more resilient in a weak commodities environment.
According to BlackRock, emerging market governments have accumulated less dollar debt, built up foreign reserves and adopted flexible exchange rates to obviate mistakes during the 1980s and 1990s crises. Though the current outlook for emerging markets debt is far from sanguine, some analysts see opportunity in the asset class. [Investors Turn to Emerging Market Bond ETFs for Higher Yields]
Now, some market observers see opportunity with developing world bonds even as stocks from Brazil to China weaken.
“We believe it is time to rethink exposure to emerging markets debt (EMD). Many of the downside risks we highlighted in our 2016 Outlook published late last year have been front-loaded. First, commodity prices, and particularly oil, have taken another significant leg down. Second, China’s central bank has depreciated its currency and unveiled a new FX management framework. Third, heightened risk aversion … [has produced]a new wave of market panic,” according to part of a BlackRock note posted by Dimitra DeFotis of Barron’s.