This year, investors are flocking to fixed income exchange traded funds and that includes 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).
Emerging market bond funds are experiencing the largest inflows on record as pension funds, sovereign wealth funds and other big institutions joined the search for riskier asset classes, reports Jonathan Wheatley for the Financial Times.
Investors’ thirst for yield and a cooperative Federal Reserve, which still has not raised interest rates in 2016, are among the reasons emerging markets debt is one of this year’s hottest asset classes.
Enticing greater investment dollars, economic fundamentals and idiosyncratic risks in the emerging markets are improving, such as rising oil and commodity prices that are supporting major emerging economies, like Brazil and Russia. Additionally, concerns over China downturn, which drove bearish positions last year, have diminished.
“Roughly $14 billion has poured into emerging-market debt over the past four weeks, marking the longest streak of buying in emerging-market debt funds since September 2014, according to a weekly report on funds flows from Bank of America Merrill Lynch,” reports Sushma Un for MarketWatch.
Related: Emerging Markets are Hot for Bond ETF Investors
In fact, the recent growth of EMB, the largest ETF tracking emerging markets debt, has been staggering. 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. EMB is now the largest emerging markets debt fund in the world, ETF or otherwise.
According to BlackRock, emerging market governments have accumulated less dollar debt, built up foreign reserves and adopted flexible exchange rates to obviate mistakes during the 1980s and 1990s crises. Though the current outlook for emerging markets debt is far from sanguine, some analysts see opportunity in the asset class.
Demand for emerging-market debt has been fueled, in part, by a global environment where more than $12 trillion in government debt is offering negative interest rates, according to Fitch Ratings. Essentially, negative yields mean that lenders pay borrowers to park their money,” according to MarketWatch.
Related: 3 Bond ETFs Hinting at Emerging Markets Upside
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.
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iShares J.P. Morgan USD Emerging Markets Bond ETF
Tom Lydon’s clients own shares of EMB.