Amid dollar strength, emerging markets bonds and the related ETFs are struggling this year. Year-to-date, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: EMB), the largest ETF in this category, is down almost 8%, but that is not stopping some investors from bargain hunting with the fund.
Beyond the short-term volatility associated with the trade fears, many are wary of the diverging monetary policies between emerging central banks and the Federal Reserve, which is expected to hike interest rates two more times this year. While central banks in developing countries could also respond with their own rate hikes, the higher interest rates would stifle growth.
“The market value of the iShares JPMorgan USD EM Bond ETF rose to $14.31 billion at the end of last week, helped by a second weekly rally as well as $169 million of new deposits, the biggest flows for any U.S.-traded ETF investing in developing nations,” reports Bloomberg.
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. The ETF has an effective duration of 7.20 years.
Fundamental Issues
As the global economy continues to expand, many will increase consumption of raw materials to fuel the expansions, which in turn would support most of the emerging markets that help supply the raw commodities, such as oil and metals.