Inflows into emerging market (EM) ETFs confirm that investors are ready to pile back into riskier assets. In the case of bonds, improving credit profiles are also stoking investors’ appetite for EM bonds.
In turn, demand for EM bonds has been met by record issuance this year. While the case for EM bonds has typically been their attractive yields — albeit more credit risk — now investors are also taking on less risk. This is evident in the fewer number of defaults in EM countries on a year-by-year basis.
“The risk of government defaults in emerging markets this year is subsiding, stoking a rally in bonds that were just recently teetering on collapse and propelling junk-rated sovereign debt to its best start to a year since 2019,” Bloomberg reported. The report also noted that only “10 countries are now flashing signs of distress in the bond market, half as many as in 2022.”
Furthermore, the anticipation of lower interest rates in the U.S. is increasing the prospects of a weaker dollar. That should, in effect, boost EM assets such as bonds, offering price appreciation in addition to yields.
All this sounds appealing to prospective EM bond investors looking to not only attain higher yields, but to diversify their bond portfolios. Given this, one option worth considering is the Vanguard Emerging Markets Government Bond ETF (VWOB). The fund is deeply diversified, offering over 700 bond holdings with an average duration of just over seven years. As of March 14, the fund’s 30-day SEC yield is 6.75%, which should appeal to yield seekers. Additionally, this fund comes with a low expense ratio of 0.20%.
Record Issuance in EM Bonds ETF’s Top Holdings
VWOB seeks to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. The index specifically measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries.
As mentioned earlier, there has been record issuance of bonds to start 2024. It’s been a global phenomenon that’s permeated public and private sectors. Saudi Arabia issued $12 billion in bonds back in January, which is notable given that VWOB’s bond holdings comprise mostly Saudi Arabia bonds.
The second largest debt holding found in VWOB’s portfolio is Mexico bonds. The second largest economy in Latin America also issued a record number of bonds, reaching $20 billion, per a Bloomberg report, to start the year due to high investor demand.
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