Emerging Markets are Hot for Bond ETF Investors

Fixed-income investors can tap into the emerging market through a number of ETF options. For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and more recently launched the VanEck Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (NYSEArca: IGEM) provide exposure to U.S. dollar-denominated emerging debt securities, or developing country bonds issued in U.S. dollars. The USD denomination can help support these funds in case of a sudden appreciation in the greenback. EMB has a 4.58% 30-day SEC yield and IGEM has a 3.51% yield to maturity.

“Adding U.S. dollar-denominated investment grade emerging markets bonds to a global bond portfolio can add yield and diversification, without a significant increase in credit and currency risk,” Sokol said.

While the emerging markets may be associated with greater risk, these bond ETF options include a mix of high-quality debt exposure, limiting potential credit risks. For example, EMB includes 2.2% investment-grade AA-rated debt, 11.9% A and 42.8% BBB. IGEM includes a slightly larger percentage of investment-grade exposure, with 2.1% AA, 16.7% A, 58.8% BBB.

With many emerging market central banks cutting interest rates amid lower inflation, the loose monetary policies should help support many local rates markets. Investors may also take a look at local currency-denominated ETFs, or emerging market bond ETFs that are issued in their local currencies, including the VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) and actively managed WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD). The local currency emerging market bond ETFs come with slightly higher yields. EMLC has a 5.49% 30-day SEC yield and ELD has a 5.61% 30-day SEC yield.

Moreover, they have slightly higher credit qualities. EMLC includes 5.8% AAA, 3.0% AA, 28.5% A and 34.1% BBB. ELD holds 6.6% AAA, 9.5% AA, 35.2% A and 38.5% BBB.

Related: Going Local With Emerging Markets Bond ETFs

However, with all investments that may produce higher returns, investors should be aware of the potential risks.

“We see hard-currency EM debt providing a more stable income stream than local currency options,” Turnill said. “EM local debt may offer more upside, however, for those willing to accept currency risk.”

Click here to read the full story on ETF Trends.