Time to Take a Second Look at Emerging Market Bond ETFs

Following Donald Trumps election day win, investors sold off emerging market assets and related exchange traded funds in a knee-jerk reaction to the President-elect’s protectionist rhetoric and strengthening U.S. dollar. With the dust settling, some investors are taking a second look at potentially oversold emerging market bonds.

“Higher quality bonds now also provide an approximately 90 bps pickup versus U.S. investment grade corporate bonds, a significant increase in relative value versus October,” Fran Rodilosso, Head of Fixed Income ETF Portfolio Management at VanEck, said in a note. “High yield emerging markets corporate bonds posted a relatively modest negative return of -1.6% due to a shorter duration than other sectors, and remain a bright spot with year-to-date returns of 14.4%. These gains have been driven equally by the significant carry they provide, as well spreads which have tightened year to date (and which remained steady in November).”

While there are concerns over potential protectionist policies that could leave emerging countries out to dry, VanEck believes emerging market fundamentals, like growth, debt stock, real rates and policy flexibility, all remain at a favorable starting point relative to developed economies going into 2017.

However, Rodilosso warned that factors like U.S. rates, growth and inflation, EU and Japanese monetary policies could all potentially weigh in the emerging market outlook.

“While emerging markets assets can do better in 2017 than recent press and analyst coverage may suggest, we believe that being savvy and opportunistic (and contrarian) about adding exposure could help enhance the risk/reward,” Rodilosso said.