With interest rates still low by historical standards throughout the developed world, income-seeking fixed income investors are embracing alternatives to traditional government debt. That includes emerging markets bonds and the related ETFs, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: EMB).
EMB tracks the J.P. Morgan EMBI Global Core Index, a market-cap-weighted index. Potential investors should note that since it is a cap-weighted index, countries with greater debt will have a larger position in the portfolio. EMB is now the world’s largest emerging markets bond fund, ETF or mutual fund.
“We like selected EM debt for income and potential price appreciation amid low inflation and subdued currency volatility in the emerging world,” said BlackRock in a recent note. “EM debt also gleans support from synchronized global growth, buoyant commodity prices and global investor thirst for yield.”
EMB, which holds 385 bonds, has a 30-day SEC yield of 4.4% and an effective duration of almost 7.3 years. Duration measures a bond’s sensitivity to changes in interest rates. The iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB) shows a 5.56% 30-day SEC yield. That ETF could be poised to thrive if the dollar remains sluggish.
“Stronger EM currencies have boosted the performance of EM local-currency debt this year,” according to BlackRock. “We see the U.S. dollar appreciating only modestly and gradually—and not diluting the EM investment case. So what are the main risks? A stalling of global growth momentum, a yield spike caused by slowing monetary stimulus, or a rapidly resurging dollar.”