Exchange traded funds holding emerging markets sovereign debt have been getting increased attention this year as the weaker dollar brings some relief to developing world issuers and as yield-starved investors seek alternatives to developed world bonds.
The Vanguard Emerging Markets Government Bond ETF (NasdaqGM: VWOB) is another name to consider among emerging markets bond ETFs. Previous Fed rate hikes have triggered volatility in the emerging markets. 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.
“There are good reasons to consider a Vanguard ETF like VWOB. Emerging markets bonds denominated in U.S. dollars, such as the nearly 900 bonds held by VWOB, are predictably sensitive to fluctuations in the U.S. currency. The stronger the dollar, the more investors are likely to eschew dollar-denominated emerging markets bonds because a sturdy greenback implies greater external financing needs for issuers of developing world debt,” according to InvestorPlace.
On Wednesday, Federal Open Market Committee (FOMC) meeting minutes revealed the Fed is concerned about the U.S. labor market. That is prompting some traders to think an interest rate hike this year is nearly out of the question, a sentiment that is dollar negative.[related_stories]
That is good news for VWOB and rival emerging markets bond funds because the strong dollar was previously a drag on emerging markets debt. Additionally, the longer the Fed holds off on raising rates, the longer high-yielding assets remain attractive.
With interested rates expect to remain lower in the developed world and perhaps decline further, some strategists see emerging markets sovereign debt as a prime destination of income-starved investors.
“Further increasing the allure of this Vanguard ETF is the fact that yields on Brazilian and Russian sovereign have recently plummeted, meaning prices on those bonds are rising,” adds InvestorPlace.
In addition to Brazil and Russia, China and Mexico are among the big issuers found in VWOB’s lineup.
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Vanguard Emerging Markets Government Bond ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.