Emerging Bond ETFs Could Offer Opportunities in New Year

Emerging market bonds and related exchange traded funds have weakened ever since Donald Trump won the elections and promised to enact protectionist policies, but recent selling could provide a good entry point for long-term investors.

The recent sell-off led to value in emerging market debt, William Sokol, Product Manager of ETFs at VanEck, told ETF Trends in a call. While emerging bonds may continue to experience short-term volatility in response to President-elect Donald Trump’s policies, there is no real change in fundamentals.

“For the long-term, our view is that any declines provide good opportunity to add exposure,” Sokol said.

Due to the tremendous diversity within the emerging market bonds, structural reforms many countries have implemented and improved fundamental outlook, there is a strong case for strategic long-term allocation to emerging market debt within a diversified investment portfolio, Sokol said in a research note.

Nevertheless, Sokol warned that investors should expect short-term volatility in the coming months until President-elect Trump clarifies some of his positions and is ability to implement policy changes. Consequently, these rockier periods could lead to attractive entry points for investors.

For now, the “Trump trade” has exhibited higher interest rates across the yield curve and an appreciating U.S. dollar due to rising growth and inflation expectations.

“If this continues, credit sensitive asset classes such as high yield emerging markets corporate bonds may benefit,” Sokol said.