Strengthening developing economy currencies along with a growing economy may continue to support the outlook for ETFs that track emerging market stocks and bonds.
Emerging markets assets, including bonds, are rebounding this year. For investors that want to embrace emerging markets debt with lower duration, the ProShares Short Term USD Emerging Market Bond ETF (CBOE: EMSH) is a credible idea.
EMSH, which is higher by more than 2% this year, tracks the DBIQ Short Duration Emerging Market Bond Index. EMSH’s holdings are dollar-denominated, meaning those bonds stand to benefit as the U.S. dollar declines because financing that debt is easier when the dollar loses value.
“As the recovery in emerging markets starts to abate, bonds are seen as the most resilient asset class amid a dovish Federal Reserve and the mounting prospect of slower global growth,” reports Bloomberg. “Most respondents in a Bloomberg survey of 36 global fund managers, strategists and traders expected developing-nation debt to continue this year’s rebound. They were less sure about the rallies in currencies and equities.”
What’s Next for Emerging Market Economies
Some market observers believe that the weakening U.S. dollar or strengthening emerging currencies helps remove a key risk for emerging market economies with large external debt burdens. Since many emerging debtors borrow in U.S. dollar-denominated debt, a stronger greenback would raise borrowing costs or tighten a developing economy’s financial conditions.
EMSH provides exposure to 27 emerging markets with weights ranging from 0.89% (Panama) to 10.03% (China).
“On a country by country basis, Brazil, which last month saw its key rate held at a record low, and Indonesia, where the monetary authority has been buying bonds and currency to stabilize the nation’s markets, were among the top picks. Argentina, with the world’s highest interest rates, and Turkey, where the swap rates briefly surged beyond 1,300 percent, continued to be the least popular,” according to Bloomberg.
Brazil and Indonesia combine for 15.60% of EMSH’s weight while the fund has a 5.26% weight to Turkish debt and a 3.55% allocation to Argentina. EMSH has a modified duration of 2.44 years.
For more on core investing strategies, please visit our Core ETF Channel.