Going Local With Emerging Markets Bond ETFs

Emerging markets fixed income exchange traded funds (ETFs) have been among the best-performing ETFs this year that offer exposure to developing economies. Although investors often prefer the funds that hold dollar-denominated emerging markets debt, rebounding currencies indicate local currency ETFs offer upside as well.

Moreover, some argue that the emerging market debt outlook looks more favorable as commodity prices, notably oil, seem to have stabilized and economic activity in some key developing countries begin to rebound. The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSEArca: EMLC) is one of the ETFs in this space to consider.

Related: 3 Bond ETFs Hinting at Emerging Markets Upside

Investors may be attracted to the cheaper valuations and wider yield premiums that emerging market bonds offer over safe-haven government debt, especially with yields on benchmark 10-year Treasuries dipping back toward historical lows this year.

Moreover, emerging market assets as a whole remain depressed to developed markets. Consequently, the unloved area may have already priced in most of the negatives that have previously pressured the market.

“Record-low yields in developed markets and relatively high GDP growth in emerging markets and strong demand from investors seeking yield/risk proved to be encouraging factors in the global bond market. A case in point was Argentina’s April 2016 Eurobond issue, which was three times oversubscribed by investors, with $65 billion worth of bids (at 7.5% coupon),” according to a Pavilion Global Markets note posted by Dimitra DeFotis of Barron’s.