Emerging market bond ETFs have strengthened this year and the asset category may still have legs.
“With strong emerging markets local currency bond returns this year thus far and institutional emerging markets FX exposure at a post-crisis high, according to J.P. Morgan, investors may be asking whether there is still room for additional returns in the asset class. We believe there is,” Fran Rodilosso, Head of Fixed Income ETF Portfolio Management for VanEck, said in a research note.
The J.P. Morgan GBI-EM Global Core Index increased 13.9% year to date through September. Rodilosso argued that local interest rates, which include both carry and price movements from changes in local interest rates, contributed to 8.1% of that total return while currency appreciation accounted for 5.4% of the return.
Regional differences also helped offset some other areas of weakness. For instance, Asian, Latin American and Middle East/African countries experienced strong rate performance. Meanwhile, European currencies have returned almost 12% and contributed to over 50% of overall currency returns on local currency bonds.
European emerging market currencies like the Polish zloty, Hungarian forint and Czech koruna, which benefited from their close ties to the euro currency and ongoing growth in the Eurozone, were among the major contributors to emerging market bonds.