Despite the recent weakness in the developing market segment, investors can still look to emerging market bond ETFs for their attractive payouts.
With yields on benchmark 10-year Treasuries hovering around 3% and the average return on long-term investment-grade corporate bond near 4%, the 6% yields generated from emerging market debt is an attractive alternative.
For example, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NasdaqGM: EMB), the largest emerging market bond-related ETF on the market, has a 5.27% 30-day SEC yield and the iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB), which tracks local currency-denominated EM debt, shows a 6.15% 30-day SEC yield.
“We believe U.S. investors should have an allocation to emerging market bonds,” Pablo Goldberg, a senior fixed-income strategist for BlackRock, told CNBC. “They have a higher yield, they have good fundamentals, commodities prices are firm, and investors can diversify their currency risk.”
Greater Risk Associated With Emerging Market Debt
However, potential traders need to be aware that there is greater risk associated with emerging market debt. EM assets are among the first to suffer when the markets sour. For instance, emerging market assets experienced a sharp decline after the so-called Taper Tantrum of 2013 when the Federal Reserve announced a reduction to its quantitative easing program. Despite the recent bout of volatility in the equities market, George Rusnak, co-head of fixed-income strategy for the Wells Fargo Investment Institute, argued that this time is different.
“The emerging markets are more robust now,” Rusnak told CNBC. “More countries and companies issue debt in their own currency, and they have better access to markets across the liquidity curve. It makes them better able to withstand challenging times.”
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Furthermore, the fundamental picture looks stronger. The global economy is expanding and the export-driven emerging markets will benefit, especially with rising commodity prices – the World Bank projects the global economy will grow at a 3.1% rate this year, with the emerging markets showing a 4.5% expansion in 2018 and 4.7% in 2019.
Many developing countries have also managed stable debt levels, with less than half the ratios in developed market countries. China is a notable exception as it shows sovereign debt exceeding 200% of GDP.
For more information on the fixed-income market, visit our bond ETFs category.