Look to EM, High-Yield Bond ETFs in Rising Rate Environment

In anticipation of the Federal Reserve’s tightening monetary policy ahead, fixed-income investors may look to emerging market debt and high-yield bond exchange traded funds to diversify away from potential risks associated with traditional U.S. government debt exposure.

“If faced with duration or interest rate changes as risk factors, emerging markets and high-yield bonds may present more opportunities than government or investment grade bonds for fixed income investors,” Jan van Eck, CEO of VanEck, said in a note.

For instance, bond investors may look to something like VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC), VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM), VanEck Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (NYSEArca: IGEM) and VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG) to diversify their fixed-income portfolio with overseas opportunities and potentially higher yield generation.

Van Eck argued that as rates in the U.S. and Europe normalize, emerging market debt may we relatively insulated from the interest rate changes. Some investors, though, may be concerned about currency risk with EM debt exposure, but VanEck remains bearish on the greenback, which should maintain a bullish outlook emerging market assets.