If EM Bonds Look Like a Bargain, Then Check Out This ETF

With the effects of the pandemic on emerging markets (EM) waning, investors are ready to re-invest back into the EM bond market, which is looking like a bargain lately.

Even as the U.S. Federal Reserve raised the federal funds rate by 25 basis points, a Bloomberg Quint article notes that investors are seeking ways to thrive in tighter monetary conditions. With rates pushing higher, a stronger dollar is expected to follow suit, and thus, EM bonds denominated in U.S. dollars look ripe for the picking.

According to the article, EM bonds denominated in dollars do “have a history of rallying during Fed hikes. While a worsening war in Ukraine — or fallout from a Russian debt default that’s possible as soon as Wednesday — may still derail this trade, a fear of missing out on a market bottom is pushing investors to selectively load up on the securities.”

“Emerging-market spreads have never finished a calendar year with a negative return when starting above 300 basis points,” said Francesc Balcells, chief investment officer of emerging market debt at FIM Partners in London. “There is a lot of negativity priced into the debt at the moment.”

1 EM Bond ETF to Consider

EM bonds can offer investors more yield if they are willing to step out further onto the credit risk spectrum. One such fund to consider for EM bond exposure is the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB).

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 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 and a 30-day SEC yield of just over 5.30% as of March 15.

For more news, information, and strategy, visit the Fixed Income Channel.