If the Federal Reserve hikes rates, emerging market companies that borrowed overseas are more susceptible to foreign capital swings and could find it more difficult to refinance debt. Moreover, a strengthening dollar makes it costlier to pay off dollar-denominated bonds.

PCY, which has a 30-day SEC yield of just under 5.3% and a modified duration of 8.5 years, features some exposure to Central European and African economies.

Active managers have been vocal critics of emerging markets bond ETFs. In some cases, these managers highlight tracking error of passive products as a potential problem for investors.

“Still, some active managers say ETFs are flawed products for these investments and can’t properly replicate indexes. Because of liquidity constraints, ETF providers tend to own the more liquid bonds as a proxy for the entire market. That has led prices of certain bonds that are ETF constituents to become more costly as flows of cash increase—a circumstance that has emerged with some Russian and Indonesian bonds this year,” according to the Journal.

For more information on the fixed-income market, visit our bond ETFs category.

Tom Lydon’s clients own shares of EMB.

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