Given the current geopolitical risks swirling around emerging markets (EM), investors may want to avoid the EM assets altogether. But if yield and risk are mitigated with one exchange-traded fund (ETF), they may want to reconsider.
A stronger dollar amid high interest rates and geopolitical risks are keeping EM assets from investor radars these days. This is despite their potential inclusion in a portfolio as a growth diversification tool. Despite the benefits that EM assets can bring, the risk may potentially be too high in the current market environment.
“Emerging-market assets were under pressure on Wednesday (October 18), as soaring oil prices and conflict in the Middle East overshadowed any optimism generated by forecast-beating Chinese growth data,” Bloomberg reported.
“Stocks and currencies fell to the lowest in more than a week as a wave of risk aversion gripped markets as traders worried about an escalation of the conflict in the Middle East,” the report added. “The Mexican peso sank 1.4% versus the greenback, leading losses among developing-world currencies.”
Investors can still reap the benefits of EM assets such as bonds. Bonds can offer attractive yields that fixed income seekers are looking for. That’s especially the case in the current high-rate environment. But are investors willing to accept the increased risk in order to extract that extra yield?
One way to mitigate risk is active management, which allows for more flexibility in the market. Holdings can be adjusted on the fly, allowing for portfolio managers to tilt toward bonds that offer less risk.
The added yield and active management component can inherently be found in the convenience of one ETF.
Yield and Active Management
Given the vast opportunities in EM bonds and the various strategies that can be implemented, there’s a simple solution worth considering: the American Century Emerging Markets Bond ETF (AEMB). In terms of holdings (over 140 of them), investors will see a mix of debt in corporate, sovereign, and quasi-sovereign. This gives AEMB a dose of diversification while also maximizing yield at the same time. This is a top-of-mind subject,.This is especially so if central banks around the world start scaling back on rate hikes and yields follow suit.
As of September 29, AEMB features a 30-day unsubsidized yield of about 7.82%. Its 12-month distribution rate, again as of September 29, is 6.25%. In terms of duration (option-adjusted), it falls within the intermediate range of 6.98 years.
For more news, information, and strategy, visit the Core Strategies Channel.
