In a lower-for-longer interest rate environment with depressing bond yields across the board, many fixed-income investors are turning back to emerging market bond ETFs.
For example, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB), the largest emerging market bond-related ETF by assets, has attracted $721 million in net inflows over the past month, according to XTF data. EMB shows a 3.89% 30-day SEC yield.
According to EPFR Global data, emerging-market bond funds have brought in positive inflows for 10 weeks in a row starting in early July, with the bulk of the money coming in over the three weeks spanning late August and early September when net inflows hit about $8 billion, the Wall Street Journal reports.
“Emerging markets continue to look attractive and cheap versus developed markets,” Yacov Arnopolin, an emerging-markets debt portfolio manager for Pacific Investment Management Co., told the WSJ. “We are back to yield starvation, the same yield starvation we experienced before Covid.”
Investors typically turn to emerging markets for their more attractive returns during periods of growth, but the asset category can experience sharp losses during downturns due to their higher risk exposure. Emerging-market funds have suffered from a rocky start this year even before the coronavirus struck as a result of falling commodity prices and high-profile defaults, notably from Argentina and Ecuador. About $53 billion was pulled from emerging-market bond mutual funds and ETFs from March to the end of June due to concerns that the coronavirus would take a heavier toll on the developing markets.
The pandemic exacerbated the risk-off selling in emerging assets, but investors are slowly dipping back in since there are few attractive options left in the U.S. and Europe where yields are trading near historic lows.
“When you have a crisis, investors say ‘enough emerging-markets spice, I want home cooking,’” Eric Ollom, a strategist at Citigroup, told the WSJ. “Now that home cooking is tasting boring and they are saying, ‘I want more emerging-markets spice.’”
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