Concerns Surface for Emerging Markets Bond ETFs

The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY), another dollar-denominated ETF, is another emerging markets bond ETF to consider. PCY is the second-largest dollar-denominated emerging markets bonds ETF behind EMB.

Related: Bond ETF Investors Should Consider ESG Theme Potential

A U.S. dollar-denominated investment grade sovereign emerging market bond strategy may also help investors focus on higher quality assets and avoid the volatility associated with emerging market local currencies while gaining exposure to high credit quality.

“However, within the EM total, current accounts have become more balanced since 2013 as the deterioration mainly reflects Gulf Cooperation Council (GCC) countries, which were previously running large surpluses, while many countries then running large CADs, such as all of the so-called ‘fragile five’ (Brazil, India, Indonesia, South Africa and Turkey), have narrowed their deficits. The median CAD for Fitch-rated EMs rose to 3.3% of GDP in 2016 from 2.5% in 2013. We forecast 20 EM to run CADs of over 5% of GDP this year, with half of them in double-digits,” according to Fitch.

For more on bond ETFs, visit our fixed income category.