Higher Yields Are Luring Investors to Emerging Markets

Emerging markets bonds offer elevated levels of income, but the asset class can be tricky to navigate for ordinary investors. Active management can help separate risk from reward. One prominent example is the Global X Emerging Markets Bond ETF (EMBD).

EMBD primarily invests in emerging market debt securities denominated in U.S. dollars, however, the fund may also invest in those denominated in applicable local foreign currencies. Securities may include fixed-rate and floating-rate debt instruments issued by sovereign, quasi-sovereign, and corporate entities from emerging market countries.

In the first quarter, EMBD beat its benchmark, the JP Morgan EMBI Global Core Index, by 133 basis points.

“Sentiment towards risk assets started 2021 on a positive note as new information about the efficacy of coronavirus vaccines revealed that several were successful in curbing the spread of COVID-19. This news further supported the market’s optimism towards continued global growth with the expectation of global coordinated fiscal expansionary policy underpinned by accommodative monetary policy,” according to Global X research.

EMBD 1 Year Total Return

The Hunt for Bond Yield Moves Overseas

Emerging markets debt is being helped this year by a confluence of favorable factors, including the weak U.S. dollar and loose monetary policy by many central banks in developing nations. Still, EM bonds faced some first-quarter challenges.

“China began implementing macro policy measures while its economy continued to build momentum. Chinese leaders repeatedly warned the need to reign in the excess corporate debt growth and prevent real estate prices from rising, which had been a key driver of social unrest,” notes Global X. “In sum, EM assets faced a much more challenging environment than anticipated.”

An improving macro environment in the United States and China – the world’s two largest economies – could also be supportive of EMBD upside in the second half of 2021.

“As US growth momentum approaches the Fed’s threshold for reining in quantitative easing (QE) policies and EMs struggle with vaccine supply shortages, the macro backdrop for EM assets could continue to be very challenging,” adds Global X. “However, vaccine supply should be more readily available for EMs starting in Q2, spurring developing economies to likely replicate the strong US growth trajectory over coming quarters.”

The $106.64 million EMBD has a 30-day SEC yield of 2.93%.

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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.