While the expectation in the capital markets is that inflation will eventually subside and interest rates will fall, fixed income investors may still want more yield. One place to look is emerging market (EM) bonds, or more specifically, the American Century Emerging Markets Bond ETF (AEMB).
Less-seasoned investors dabbling in EM debt for the first time may want to be wary. Increased yield typically accompanies higher credit risk.
“Emerging-markets debt is not for the faint of heart,” wrote Lan Tran in Morningstar. “The asset class struggled during the coronavirus shock in early 2020, then briefly but victoriously rebounded, only to precipitously fall again in 2021 as geopolitical tensions and U.S. interest rates rose.”
Despite this, the end of 2022 saw increased faith in EM debt. This circles back to the expectation that global central banks will eventually fight off inflation with rate-hiking and EM will subsequently benefit.
“Yet performance perked up in the final stretch of 2022, turning net flows positive as investors again grew more comfortable with the asset class,” Tran wrote.
If investors understand the risks, one way for easy ingress into EM debt is via exchange traded funds (ETFs).
“The easiest way to obtain exposure to emerging-markets debt is through broad index exchange-traded funds,” Tran noted. “Even if investors are content with this approach, the quirks in this market can still complicate picking a strategy.”
Avoid the Confusion With AEMB
As Tran noted, diving into EM debt is not without its complications. To make things less complicated, investors can opt for an active management strategy that’s inherent in an ETF like 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 features a 30-day unsubsidized yield of about 7.19%. Its 12-month distribution rate, again as of May 31, is 5.71%.
In terms of holdings (over 120 of them), investors will see a mix of debt in corporate, sovereign, and quasi-sovereign. This gives AEMB a dose of diversification while maximizing yield at the same time.
Salient 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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