When it comes to diversifying a bond portfolio, getting emerging markets (EM) exposure doesn’t have to be a daunting task. Despite headwinds like a rising dollar and global inflation, EM bonds can march to the beat of their own drum.
More specifically, EM countries can be in different economic cycles than their peers. As a result, isolated economic issues in certain countries remain contained, which can be a boon for investors looking at EM bonds.
“Emerging market countries diverge sharply when it comes to economic growth and credit risks. For bond investors, that could be a good thing,” an Institutional Investor article said.
“That’s because there’s little risk that a bond default in one region would be passed on to another,” the article added further. “According to Jonathan Davis, senior v.p. and fixed-income client portfolio manager at PineBridge Investments, emerging market bonds provide good diversification benefits, since the downgrade of a bond is rarely contagious.”
Another way to help mitigate risk is to simply put the bond selection in EM in the hands of professionals. This can be done via an actively managed exchange traded fund (ETF).
Active EM Income
One such ETF to consider for the income potential in EM bonds is 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 June 30, AEMB features a 30-day unsubsidized yield of about 7%. Its 12-month distribution rate, again as of June 30, is around 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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