A Case for Emerging Markets Bond ETFs

Even amid concerns about U.S. monetary policy, emerging markets bond exchange traded funds, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) have been decent performers this year, a trend some market observers believe will continue as investors keep looking for higher yielding assets.

Emerging currencies have strengthened on improving commodity prices, notably the rebound in crude oil prices, as many developing economies are major exporters of raw materials. Consequently, more investors are looking to emerging market yields, despite the risks associated with the developing economies.

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.

“As fundamentals improve and fund flows continue, we see value in high-yielding local bonds, such as those in Brazil, India and Indonesia, where real yields look attractive,” according to a J.P. Morgan Asset Management note posted by Dimitra DeFotis of Barron’s.

Previous Fed rate hikes have triggered volatility in the emerging markets. 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. The Fed raised rates earlier this month, marking the third time it has done so in the past 15 months.