The emerging markets have been pummeled this year, but after the selling, EM debt and bond-related ETFs appear attractive for their level of risk.
“Given the state of the world with strong U.S. growth and contained inflation globally, it’s hard to imagine that emerging markets would suffer so much this year,” Pablo Goldberg, a senior fixed-income strategist with BlackRock, told CNBC. “There’s been a general pullback from risk in emerging markets.”
For example, thee iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) has declined 4.3% year-to-date.
Spread of Average Emerging Markets Bond Yields
After the pullback in emerging assets, the spread of average EM bond yields over comparable duration U.S. Treasuries have significantly widened, with the average yield on the JP Morgan Emerging Markets Bond index up to 5% last week.
“It’s hard to buy when others are selling, but blood is in the water and that’s when you want to get involved,” George Rusnak, co-head of fixed-income strategy at Wells Fargo Investment Institute, told CNBC. “We look for value. Domestic high-yield bonds are priced for perfection, so you’re not getting paid for a risk that is still there. With emerging markets, you get more compensation for the risk. If we want to get aggressive, it’s in emerging market debt.
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While many are still wary of the current international environment, especially with increasing trade disputes, the strength in the U.S. dollar and rising interest rates are a bigger headwind. Nevertheless, BlackRock argued that potential investors should look to USD-denominated EM debt to diminish risks.
“In fixed income we prefer selected hard-currency EM debt. It provides some insulation against currency declines and looks relatively cheap versus local-currency debt,” according to a recent BlackRock note.
Along with EMB, fixed-income investors can look to options like the Invesco Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) and JPMorgan USD Emerging Markets Sovereign Bond ETF (NYSEArcaL: JPMB) to gain exposure to dollar-denominated emerging market debt.
For more information on fixed-income assets, visit our bond ETFs category.