Hot Emerging Market Bond ETFs Outside The U.S.

Emerging markets bonds, including those denominated in local currencies, are among this year’s best-performing asset classes as fixed income investors continue scouring the globe for more enticing yields.

Dollar-denominated funds such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) to local currency fare such as the VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) have been steady performers this year.

EMLC, which holds bonds denominated in local currencies, allocates over 20% of currency weight to bonds from Central and Eastern European issuers. Poland is that ETF’s largest country weight, followed by Mexico.

Investors can look to overseas assets or corporate debt to bolster yield generation. For example, investors have a number of ways to gain exposure to the high yielding emerging bond market, such as the broad VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG) and the VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM), in addition to EMLC.

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

“The Bloomberg Barclays index tracking emerging market bonds is up 4.3 percent this year, unhedged for currency, and a total of 28 percent for the last five years, more than double the gains for the Bloomberg Barclays U.S. Bond Aggregate Index,” reports CNBC.

The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), another dollar-denominated ETF, is another emerging markets bond ETF to consider. PCY is the second-largest dollar-denominated emerging markets bonds ETF behind EMB.

A U.S. dollar-denominated investment grade sovereign emerging market bond strategy may also help investors focus on higher quality assets and avoid the volatility associated with emerging market local currencies while gaining exposure to high credit quality.

EMB “has risen 5.4 percent this year, placing it eighth among the 19 passive funds in the segment, according to ETF Database. Its top 10 holdings are split between government bonds from Eastern European nations, like Russia and Hungary, and South American sovereign issuers such as Uruguay and Peru,” according to CNBC.

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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