- Fixed-income investors may gain exposure to U.S. dollar-denominated emerging market debt through ETF options
- EMB has a 7.01 year duration and a 5.30% 30-day SEC yield
- PCY has a 8.34 year duration and a 5.90% 30-day SEC yield
- VWOB has a 6.2 year duration and a 4.95% 30-day SEC yield
- LEMB has a 4.77 year duration and a 4.73% 30-day SEC yield
With the Federal Reserve holding interest rates and only anticipating two rate hikes this year, fixed-income investors may turn to riskier debt securities and related exchange traded funds.
The Fed’s dovish stance sent the U.S. dollar retreating, with the Dollar Index down about 1.9% since the Fed’s Wednesday announcement.
“Any weakening of the U.S. dollar will support emerging markets that have issued U.S. denominated debt and will take pressure off of China’s need to manage their currency,” Matthew Whitbread, investment manager at Baring Asset Management, said on CNBC. “This would bode well for investors able to allocate to select emerging market currencies and local bond markets.”
Fixed-income investors may gain exposure to U.S. dollar-denominated emerging market debt through ETF options. For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) has a 7.01 year duration and a 5.30% 30-day SEC yield. The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) has a 8.34 year duration and a 5.90% 30-day SEC yield. The Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) has a 6.2 year duration and a 4.95% 30-day SEC yield. Year-to-date, EMB rose 3.9%, PCY gained 3.6% and VWOB returned 3.4%.
Additionally, with emerging market currencies appreciating against the greenback, local-currency emerging market bond ETFs have also been outperforming. For local currency-denominated emerging market bond ETFs, the iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB) has a 4.77 year duration and a 4.73% 30-day SEC yield. The Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) has a 4.76 year duration and a 5.95% 30-day SEC yield. The actively managed WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) has a 5.01 year duration and a 5.89% 30-day SEC yield. Year-to-date, LEMB increased 3.7%, EMLC advanced 6.6% and ELD gained 5.3%.
“Overall, a more dovish Fed should support risky assets, in particular high yield credit that benefits both from falling yields as well as economic growth,” Whitbread added.
JNK has a 4.26 year duration and a 7.28% 30-day SEC yield. HYG has a 4.01 year duration and a 7.26% 30-day SEC yield.