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.
[related_stories]Emerging market local debt offer attractive yields. According to J.P. Morgan Chase & Co., local emerging market bonds yield an average 6.37%, or 63 basis points more than developing-nation U.S. dollar-denominated bonds.
Economists anticipate central banks from Turkey to Russia will cut borrowing costs as exchange rates stabilize, especially with the U.S. dollar weakening, which helped alleviate inflationary pressures.
Related: Treasury Bond ETFs – Best Start to Year Since 2003
“We’ve been bullish on EM debt since earlier in the year, we’ve noticed that emerging market U.S. dollar (USD) debt has outperformed local debt. Pending no Fed hikes this year, EM local debt (as well as several EM currencies) could start outperforming USD EM debt in the months to come,” according to the Pavillion Global note posted by Barron’s.
For more information on the fixed-income market, visit our bond ETFs category.
VanEck Vectors J.P. Morgan EM Local Currency Bond ETF
