Income-starved investors have been flocking to unique sources of yield this year and that includes emerging markets debt. For example, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca:EMB) is one of this year’s top asset-gathering ETFs. In fact, only one bond ETF has added more new assets than has EMB.
While there are concerns over potential protectionist policies that could leave emerging countries out to dry, emerging market fundamentals, like growth, debt stock, real rates and policy flexibility, all remain at a favorable starting point relative to developed economies going forward this year.
“BlackRock’s Pablo Goldberg, head of emerging markets fixed-income research and a portfolio manager, and Sergio Trigo Paz, head of BlackRock’s emerging markets fixed income, expect volatility in the second half of the year, with the U.S. Federal Reserve raising interest rates and tightening its monetary policy while other major central banks are in quantitative easing mode,” reports Dimitra DeFotis for Barron’s.
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.
The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY), another dollar-denominated ETF, is another emerging markets bond ETF to consider. PCY is the second-largest dollar-denominated emerging markets bonds ETF behind EMB.
“We see relative value as a more important driver of excess returns going forward. We expect emerging market debt returns to hover around coupon as the market gyrates between reflation expectations and slowdown fears. We favor hard currency sovereign, or lower-duration corporate debt, as U.S. dollar strength could revive in either scenario. Investors may want to consider switching from indexing to alpha strategies to allow for a more flexible allocation within emerging market hard and local debt quality segments, and a dynamic duration management to accommodate U.S. curve shifts and dollar strength,” according to a BlackRock note seen in Barron’s.
Related: 14 Hedged Bond ETFs for a Rising Rate Environment
EMB, which turns 10 in December, holds 370 bonds. The ETF has a 30-day SEC of almost 4.5% and an effective duration of nearly seven years. Turkey, Argentina, Russia and Colombia are among the largest issuers in the fund.
For more information on the fixed-income market, visit our bond ETFs category.
Tom Lydon’s clients own shares of EMB.