Emerging market debt have suffered more from their forex exposure than emerging market equities, William Sokol, Product Manager of ETFs at VanEck, told ETF Trends in a call.
“We have witnessed that foreign exchange currency moves, or forex risks, have affected emerging market bond returns,” Sokol said.
Fran Rodilosso, Head of Fixed Income ETF Portfolio Management at VanEck, explained that the greater effect forex exposure has emerging debt may be attributed to how the underlying indices weight holdings as many leading emerging market debt indexers do not consider Hong Kong, Taiwan and Korea to be emerging markets, which means that they have less emerging Asia exposure.
Consequently, emerging market debt investors have more exposure to countries with commodity dependency and who currently have flexible currency regimes, notably a heavier emphasis on emerging Latin American debt.
“If you are bullish on commodities or believe in the reflation story, then local currency emerging market debt may provide an attractive way to express that view and have more room to go,” Sokol said.
Looking at the previously mentioned emerging bond ETF options, investors who are more bullish on the U.S. dollar may lean toward U.S.-dollar denominated emerging bond options, such as EMB, which has a 4.62% 30-day SEC yield; PCY, which has a 5.04% 30-day SEC yield; and EMAG, which has a 4.11% 30-day SEC yield.
On the other hand, investors can turn to the local currency-denominated emerging bond ETF options, such as the EMLC, which has a 5.79% 30-day SEC yield; EBND, which has a 5.03% 30-day SEC yield; and LEMB, which has a 4.78% 30-day SEC yield.