As the global economic backdrop continues to improve, more investors could be apt to take on risk in emerging markets (EM) debt with assets like the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB).

With a vaccine rollout underway, certain revenue-generating activities are returning to EM countries.  Fixed income investors looking to extract more yield in the low-rate environment can look to EM debt markets as a viable alternative.

“Emerging markets seem to be inundated with too much positive news,” wrote Nick Eisinger, fund manager for Emerging Markets Fixed Income at Vanguard, in an IFA Magazine article. “This sounds like an odd complaint for a risky asset class. After all, emerging markets should in principle respond positively to factors such as a stronger global economy, the gradual opening up to tourism and the firming of commodity prices.”

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 Barclays USD Emerging Markets Government RIC Capped Index.

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. The fund comes with a 0.28% expense ratio.

VWOB Chart

Pandemic Still Plays a Vital Role

Before investors dive in to emerging markets debt, it’s important to note that the pandemic still plays a vital role in various credit markets. Certain countries that have been able to successfully stave off the economic effects of the pandemic will benefit the most, but there’s also the threat of rising U.S. yields that could dissuade investors from taking on the added risk of emerging markets.

“These current developments need to be taken into account when assessing the medium-term potential of emerging market bonds as a whole as well as individual sub-segments,” wrote Elsinger. “Like any asset class, they will be significantly affected by the Corona pandemic and related containment measures.”

“Overall, global vaccination programmes are having a positive impact on human health and emerging market growth,” Elsinger added. “However, individual country fundamentals will continue to diverge depending on how successful governments are in implementing their support and vaccination programmes – and how much of a burden they place on government budgets.”

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