Emerging Markets Bond ETFs Endure Venezuela Crisis

Investing in Venezuela’s sovereign debt is a dicey proposition these days. Sure, the member of the Organization of Petroleum Exporting Countries (OPEC) won a restructuring deal with Russia, but some ratings agencies have already hammered the South American nation with severe downgrades.

For example, S&P Global Ratings said Venezuela was in selective default on two its bond issues, maturing in 2019 and 2014. On Tuesday, Fitch Ratings, downgraded Venezuela’s Long-Term Foreign Currency Issuer Default Rating (IDR) to “RD” (Restricted Default) from “C.” The Venezuelan debt crisis underscores the advantages of exchange traded funds.

Funds such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: EMB) are passively managed and in most instances, the indexes these products are lightly allocated to Venezuelan debt.

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.

“At present, there is no meaningful amount of local-currency Venezuelan debt outstanding thanks to the country’s hyperinflation,” said Morningstar. “Hyperinflation has all but wiped out the value of the country’s local-currency debt as the government has kept printing more money to meet its obligations. As a result, the country’s bolivar-denominated domestic debt is essentially worthless, which explains why only hard-currency Venezuelan debts are owned by virtually all emerging-markets bond funds.”