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.
Related: Stock, Bond ETF Strategies to Fight Rising Rates
None of EMB’s country exposures exceed weights of 6.08%, but some of the fund’s top country weights are among this year’s worst-performing developing markets, including Turkey and Argentina. Those countries are also boosting interest rates to prop up sliding currencies. Earlier this month, Turkey’s central bank boosted interest rates by 625 basis points to 24%.
“This rate increase was a welcome and necessary first step towards exiting the ongoing Turkish lira crisis,” said Markit in a recent note. “The immediate market reaction was one of relief, with bond spreads narrowing and the lira rallying against the US dollar and the euro. The degree to which the TCMB increased the repo rate was a positive surprise, a more aggressive action to get in front of annual inflation than IHS Markit and many observers had anticipated.”
In an effort to stem the slide in its peso and to rebuff persistently high inflation, Argentina’s central bank recently boosted interest rates to a staggering 60%, among the highest in the world.
For more information on fixed-income assets, visit our bond ETFs category.