Active Can Help in Tricky Fixed Income Segment | ETF Trends

On the basis of yield, emerging markets debt stands out compared to U.S. Treasuries. These days, that’s not particularly difficult, but it’s alluring for many income-starved investors.

However, there are risks associated with bonds in developing economies, and some related central banks are starting to hike interest rates, indicating that investors considering this asset class for income may want to embrace active management by way of the Global X Emerging Markets Bond ETF (EMBD).

Potentially make active management and EMBD all the more important for investors considering emerging markets debt is the recent emergence of the delta variant of the coronavirus pandemic.

“With low vaccination rates, the new spread forced some EM countries to adopt restrictive social-distancing measures to prevent a deterioration of their health care systems. These actions inevitably pared growth expectations. The growth divergence between EM (excluding China) and DM shifted from +6.5% in Q1 to -11.9% in Q2, as Latin America and EM Asian economies shrank during the quarter,” according to Global X research.

Examining EMBD

EMBD, which recently turned a year old, sports a 30-day SEC yield of 3.06%. The fund features no exposure to Chinese bonds, and its largest country allocation, as of the end of the second quarter, is Mexico at 10.47%. Mexico, Latin America’s second-largest economy behind Brazil, is one of the steadier economies in that region and, due to proximity, is often more correlated to the goings-on in the U.S. than it is to other emerging markets.

Another benefit of EMBD being actively managed is that it blends both sovereign and corporate debt, something rival passive offerings in this category rarely do. Home to 235 bonds, EMBD has a duration of 9.8 years. Declining Treasury yields could make the Global X fund all the more attractive in the back half of 2021.

“During the quarter, the emerging sovereign debt market returned +4.49%, led by the high-yield sector with a return of +6.05%. The investment-grade sector, which benefited from the 10-year US government yield declining by 27 basis points, also posted a gain of +3.28% for the period,” notes Global X.

With global bond rates poised to move higher in the second half, EMBD may tilt more toward high-yield debt over investment-grade fare, confirming the utility of active management as an avenue for capitalizing on situational credit opportunities.

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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.