U.S. Bonds Still Disappoint. But EM Debt ETFs Are Going Strong

Investors are still disappointed with many income-generating assets as interest rates remain low, but with the dollar weak, emerging markets debt is growing increasingly appealing. Enter the Invesco Emerging Markets Sovereign Debt ETF (PCY).

PCY is based on the DBIQ Emerging Market USD Liquid Balanced Index. The Fund will normally invest at least 80% of its total assets in securities that comprise the Index (the ‘Index’). The Index tracks the potential returns of a theoretical portfolio of liquid emerging markets US dollar-denominated government bonds issued by more than 20 emerging-market countries. The countries in the Index are selected annually pursuant to a proprietary index methodology, and the fund as well as the index are re-balanced and reconstituted quarterly.

See also: How Emerging Markets Debt Can Help You Fight Inflation

“Simple bond-market math backs up his view. The ICE BofA US High Yield Emerging Markets Corporate Plus Index yields 1.5 percentage points more than the US High Yield Index,” reports Alexandra Scaggs for Barron’s. “That premium comes despite the fact that the emerging-market index is actually rated higher than the U.S. index, he wrote. The emerging-market index has a BB3 rating, one notch above the U.S. high-yield corporate bonds’ B1 rating, and both have held those ratings since 2005.”

PCY and the Potency of Emerging Markets Bonds

ETFs have allowed access to corners of the bond market investors haven’t always enjoyed. Emerging markets debt is a prime example. By packaging this debt in a dynamic ETF wrapper, investors not only get exposure to niche areas of the bond market, they can divest themselves of the assets quickly if they want to. The liquidity is crucial.

The combination of emerging markets and junk bonds may appear to be too risky for many income investors, but with the right methodology investors can dial back some of that risk while grabbing access to higher levels of income.

Amid low interest rates in the United States and inklings of the reflation trade taking shape, PCY is a credible near-term consideration for income-starved investors.

“Another trend that could work in favor of emerging-market bonds, and currencies, is the fact that markets aren’t fully reflecting many countries’ responses to Covid-19, wrote Oxford Economics. As a whole—though there is plenty of variation between countries—emerging markets haven’t lagged that far behind more established economies in their relative damage from the coronavirus pandemic, the firm’s economists wrote in a Feb. 23 note,” adds Barron’s.

As the global economy continues to expand, many nations will increase consumption of raw materials to fuel their expansions, which in turn support the emerging markets that help supply many of the world’s raw materials, particularly oil and metals.

PCY 3 Year Total Return

For more news, information, and strategy, visit the ETF Education Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.