ETF Trends
ETF Trends

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.

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. EMB’s holdings are also denominated in U.S. dollars. During previous eras of Federal Reserve tightening, dollar-denominated emerging debt has been vulnerable, but EMB and peer ETFs are proving sturdy this year.

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 in March, marking the third time it has done so in the past 16 months. Still, EMB has been a prolific asset gatherer among bond ETFs and is cementing its status as the world’s largest emerging markets bond fund of any variety.

“Investor demand for emerging market (EM) debt has been strong lately, as the near-term risk of trade wars has faded and income seekers have flocked to the asset class’ higher yields. EM debt funds saw 12 straight weeks of inflows, the longest streak since the U.S. election, according to EPFR Global data through the week ended April 19,” said BlackRock in a note out Thursday.

While yields in developed economies remain depressed, with some even trading with negative yields, emerging market bonds have quickly gained traction as one of the few areas left with attractive yields.

Emerging market bond investors should analyze concentration risk or look under the hood of their funds to better understand how much of a particular investment they are exposed to.

“This quarter we have added 10 additional countries to our rankings, taking advantage of the increasing depth and quality of available data on EM economies. The new members are the Dominican Republic, Ecuador, Kazakhstan, Lebanon, Lithuania, Panama, Romania, Serbia, Sri Lanka and Uruguay. The BSRI now spans 89% of the JP Morgan EMBI Global Core index and 82% of the JP Morgan EMBI Global Diversified index, as well as major developed markets,” adds BlackRock.

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

Tom Lydon’s clients own shares of EMB.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.