However, investors should be aware of the risks if things seem too good to be true. For instance, Sokol pointed out that Venezuela had an average yield of approximately 26% as of July 31, 2016, but the distressed levels reflect the economic and political risks that the emerging economy is still tackling with.
“Therefore, the very real possibility of default puts the ability of realizing this substantial yield in question,” Sokol said.
On the other hand, higher quality emerging market debt has generated lower annualized total returns, but the investment-grade debt also showed substantially lower volatility, providing more attractive risk-adjusted returns over the long haul.
“Overall, investors who maintained exposure to investment grade emerging markets sovereign bonds, with an allocation to BB-rated bonds or 20%, would have earned 7.55% over the past ten years versus 7.83% on the broader emerging markets sovereign index, with lower volatility and higher risk-adjusted returns as measured by the Sharpe ratio,” Sokol added.
For more information on the fixed-income market, visit our bond ETFs category.