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).
While there are other reasons, one of the primary driving forces behind this year’s resurgence of emerging markets debt can be explained in one word: Yield. As in investors cannot get enough of it, but among sovereign bonds, finding yield is not an easy task.
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.
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_stories]
Brown Brothers Harriman “believes that further gains for EM credit. Even with some positive data out of the US in the third quarter, softness in the first half of 2016 has helped push back the prospect of rate hikes, probably to December. Meanwhile, there’s the chance of the European Central Bank, Bank of England and Bank of Japan potentially easing further going forward, which would make EM debt even more attractive,” reports Teresa Rivas for Barron’s.
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.
With the dollar weakening and emerging currencies rebounding, 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 the WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD). ELD is an actively managed ETF.
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iShares J.P. Morgan USD Emerging Markets Bond ETF
Tom Lydon’s clients own shares of EMB.
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.