Exchange traded funds holding emerging markets debt are getting drubbed this year. That sentiment pertains to funds holding dollar-denominated and local currency debt.
For example, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: EMB) is lower by 8% while the VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) is down almost 10%.
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. EMB is now the world’s largest emerging markets bond fund, ETF or mutual fund.
The strong dollar and tariff talk, among other factors, are plaguing emerging markets bonds, but some market observers believe the asset class can bounce back.
“Market pros argue, 2018’s gloom and doom is driven by ‘idiosyncratic’ stories, from a wildcat truckers strike in Brazil to Turkish President Recep Erdogan’s insistence that higher interest rates cause inflation,” reports Craig Mellow for Barron’s.
Emerging Markets Fundamentals Still Solid
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.
“Fundamentals–current-account balances, inflation rates, global growth–are much better than they were five years ago. That points to a rally, at some point. One place where reality may be better than perception is Mexico,” according to Barron’s.
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Mexico, Latin America’s second-largest economy behind Brazil, is often one of the largest geographic exposures in emerging markets bond ETFs.
“EMLC is the largest and most liquid U.S. listed ETF providing access to emerging markets local currency bonds. It seeks to track the J.P. Morgan GBI-EMG Core Index (GBIEMCOR), which is comprised of bonds issued by emerging markets governments and denominated in the local currency of the issuer,” according to a statement from the issuer.
EMLC’s annual fee was recently trimmed to 0.30% per year, or $30 on a $10,000 investment, from 0.42%.
“Mexico is on solid ground, with its current-account deficit near a six-year low, inflation slipping sharply, and sovereign debt payments for this year comfortably funded,” according to Barron’s.
For more on the bond market, visit our Fixed Income Channel.