Investors have been quick to embrace U.S.-focused fixed income exchange traded funds this year. Another set of bond ETFs are also benefiting from still low U.S. interest rates and the Fed’s reluctance to go full-speed ahead to get back to normalized borrowing costs: Emerging markets bond ETFs, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), another dollar-denominated ETF.
Emerging markets bond ETFs, including EMB and PCY, the two largest in the space, offer compelling yields of their. Additionally, these funds look more attractive thanks to the recent struggles encountered by the U.S. dollar.
In fact, the recent growth of EMB, the largest ETF tracking emerging markets debt, has been staggering.
“Last month, assets of BlackRock Inc.’s flagship ETF for emerging-market debt surged to $6.5 billion, eclipsing the largest mutual fund in the category. For the first time, ETFs are the most-popular options for both bonds and stocks from developing nations,” according to Bloomberg.
EMB tracks the J.P. Morgan EMBI Global Core Index, a market-cap-weighted index. Potential investors should note that since it is a cap-weighted index, countries with greater debt will have a larger position in the portfolio.
Emerging market bond investors should analyze concentration risk or look under the hood of their funds to better understand how much of a particular investment they are exposed to.