Many observers anticipate interest rates will remain depressed or lower for longer, especially with markets projecting the Federal Reserve to only slowly raise rates two more times this year. Consequently, fixed-income investors are diversifying and seeking out areas of greater yields, such as emerging market debt and bond-related exchange traded funds.
“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,” Richard Turnill, BlackRock Global Chief Investment Strategist, said in a note.
Emerging market debt funds experienced 12 consecutive weeks of inflows, the longest streak since the U.S. elections, according to EPFR Global data for the week ended April 19.
“Many investors who had been scared off the asset class in the months following the U.S. presidential election moved back in,” Matthew Tucker, Head of iShares Americas Fixed Income Strategy said in a note. “Initial concerns that protectionist policies could hurt EM economies and investments abated after the new administration stepped into office. As a result the category has done surprisingly well since the start of the year: $3.4 billion has come into EM bond ETFs, and the J.P. Morgan EMBI Global Core Index has returned a robust 5.17%.”
Investors interested in emerging market bond exposure may consider a number of ETF options, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB), PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY), VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG), VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC), SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (NYSEArca: EBND) and iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB).
“However, it’s important for investors to remember that not all EM debt is created equal,” Turnill warned. “We see selected opportunities in the asset class, especially in local-currency debt among broadening reflation and limiting risks from U.S. dollar appreciation, but high valuations keep us neutral overall.”