“No risk, no reward” is a common refrain in the capital markets, and it’s no different when it comes to entering the emerging markets (EM) bond arena, but there are exchange traded fund (ETF) options to be had if investors know where to look.
Right now, the market environment is even more contentious for EM investing. Rising global inflation is putting the hurt on consumer prices, and it doesn’t get any better with a U.S. Federal Reserve ready to raise interest rates in 2022.
EM countries are typically tied to the strength of their currency, particularly when it comes to its exchange rate with the U.S. dollar. The greenback has been gaining as of late as the economic recovery from the ongoing pandemic continues, pushing the U.S. central bank into a position where it can taper off its stimulus measures.
Higher rates, however, mean that EM countries are at greater risk. That said, prospective EM bond investors should tread lightly.
“Rising U.S. interest rates are often thought to be bad news for emerging market economies (EMEs) as they increase debt burdens, trigger capital outflows, and generally cause a tightening of financial conditions that can lead to financial crises,” a Federal Reserve article explained.
An EM Bond ETF to Consider
One ETF to consider for EM bond exposure is the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB). With most of its holdings in debt rated BBB or less, investors must be aware of accepting more risk in order to obtain more yield.
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 via Vanguard’s 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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