Get China Bond Exposure With This Emerging Markets ETF

China’s equities have been wobbly lately, prompting market analysts to consider the country’s bonds as a better option. One ETF to get this exposure is the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB).

Chinese stocks were a prime alternative as a pandemic rebound play in 2020, but their performance has been waning as of late. Take into account the performance of the MSCI China index, which has fallen 12% so far in 2021.

^MSCN Chart

^MSCN data by YCharts

“We really recommended [investors]to stay sidelined for the time being,” said J.P. Morgan’s Joyce Chang, the firm’s chair of global research.

Chang noted that the country’s latest regulatory pushes have been a prime suspect in the recent performance of Chinese equities. The Chinese government’s push for consumer and social welfare targets certain companies, which could continue for quite some time.

“Those are the buzz words, and a lot of these targets are targets until 2035,” she said. “There’s reason to be cautious here.”

As such, a better alternative to play China may be its bonds. While Chang still believes that China is underrepresented in terms of global investor interest, the country’s bonds are worth looking at until the regulatory smoke clears.

“The best way to play China right now is actually plain vanilla in the bond market,” Chang said. “Chinese government bonds still have a very attractive yield relative to the rest of the world.”

Capturing Chinese Bonds While Minimizing Risk

With a 4.1% allocation to China’s debt market, investors can get exposure to the country while minimizing concentration risk. The rest is spread globally in other emerging market countries, such as Mexico, Saudi Arabia, and Indonesia.

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.

Product summary per the Vanguard website:

  • Attempts to track the performance of Bloomberg USD Emerging Markets Government RIC Capped Index.
  • Provides a convenient way to get additional exposure to emerging market government bonds.
  • Maintains a dollar-weighted average maturity consistent with that of the index.
  • Passively managed, using index sampling.

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