Here's an Alternate Way to Get Emerging Market Bond Exposure

Fixed income investors looking for more yield can give emerging markets (EM) a closer look as long as they’re willing to accept the risk. Active management could help allay the fears given the current market environment.

The economic environment hasn’t been kind to EM assets over the past couple of years. The pandemic and an ongoing recovery that’s been boosting the dollar have added a double whammy for EM investors in equities and bonds.

Still, that’s not all. Of course, there’s rising global inflation and already talks of a forthcoming recession that could hit EM countries even harder.

Given this wall of worry, investing in EM could be akin to walking around eggshells. That’s especially the case with bonds, where defaults could be looming.

“We are on the brink of an epidemic of emerging market defaults, the scale and scope of which will rival the debt crisis of the 1980s,” said Jay Newman, an EM expert at Elliott Management, writing in an op-ed in the Financial Times. “Rate increases by Western central banks, fallout from the COVID pandemic, surging food and fuel prices resulting from the economic fallout of the war between Russia and Ukraine, mismanagement, and outright corruption all are contributing factors.”

An Easier Way to Invest in EM

Given the challenges in EM bonds, there’s potentially an easier way by opting for active management. That active strategy is inherent in one exchange traded fund (ETF): the American Century Emerging Markets Bond ETF (AEMB).

AEMB seeks to deliver high levels of income and attractive risk-adjusted returns over a full market cycle. Active management essentially puts investments in the hands of portfolio managers, and with AEMB, it’s done at a low 0.39% expense ratio.

As of May 31, AEMB featured a 30-day unsubsidized yield of 6.67%. Its 12-month distribution rate, again as of May 31, was just under 5%.

In terms of holdings, investors will see a mix of debt in corporate, sovereign, and quasi-sovereign. This gives the fund a dose of diversification while maximizing yield at the same time.

Characteristics of AEMB on its product website:

  • Dynamically invests in a broad range of emerging markets debt securities, without limitations on credit quality.
  • Emphasizes hard currency (USD) sovereigns and quasi-sovereigns, as well as emerging markets corporate debt.

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