The anticipation of lower interest rates may cause some concern about falling yields for fixed income investors. But there are other options to consider, such as emerging markets bonds.
“Across Wall Street, analysts and investors had cheered 2023 as the year of emerging markets, only to be burned by a relentless climb in US Treasury yields,” reported Bloomberg. “Now, as the Federal Reserve looks set to end its most-aggressive monetary tightening campaign in a generation, they’re at it again.”
The Bloomberg article also noted that investors are reallocating back into EM assets overall, “spurring a 7.9% rally in stocks and a 6.7% run-up in sovereign bonds last month. Investors are also pouring cash into the world’s largest exchange-traded fund tracking emerging debt — a signal that mom-and-pop retail traders and sophisticated risk-takers alike are once again taking on the risky asset class.”
As mentioned, the overall sentiment for EM assets is improving. That’s especially so with the dollar retreating as of late. Rate reductions should amplify that positivity and bring more investor capital flowing into EM assets like bonds.
“I’m very fundamentally positive,” said Pramol Dhawan, PIMCO’s head of emerging-market debt. “EM is an under-owned asset class, but when you look under the hood and you dig a little bit deeper, then this is an asset class you should want to own.”
Get All-Inclusive Emerging Markets Bond Exposure
There are myriad options available to investors in the vast EM bond market. But there’s an easier, all-inclusive way. The Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB) can provide this level of exposure. The fund is deeply diversified, with almost 700 bond holdings. It has an average duration of just under seven years and a 0.20 expense ratio.
Per its baseline fund description, VWOB seeks to track the performance of a benchmark index that measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in emerging market countries. The fund employs an indexing investment approach designed to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index, providing easy access to EM government bonds.
All of the fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index. For yield seekers, the fund comes with a 30-day SEC yield of 7.26% as of December 4.
For more news, information, and strategy, visit the Fixed Income Channel.