Investors Are Return to Emerging Markets Bond ETFs

The iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: EMB), the largest exchange traded fund tracking bonds in developing economies, is up more than 4%. That after the fund struggled last year against the backdrop of rising U.S. interest rates and the stronger dollar.

EMB tracks the J.P. Morgan EMBI Global Core Index, a market-cap-weighted index. Potential investors should note that since it is a cap-weighted index, countries with greater debt will have a larger position in the portfolio. Some money managers, including Morgan Stanley, see some opportunities with emerging markets debt in the new year.

“Exchange-traded fund investors poured $887 million into strategies tied to the asset class last week amid the U.S. Federal Reserve’s even more dovish turn in policy,” reports Bloomberg. “Leading the pack was the $16.9 billion iShares J.P. Morgan USD Emerging Markets Bond ETF, or EMB, which took in $539.7 million, bringing the total in January to $1.7 billion, the most in a year.”

Other Ideas

Along with EMB, fixed-income investors can look to options like the Invesco Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) and JPMorgan USD Emerging Markets Sovereign Bond ETF (NYSEArca: JPMB) to gain exposure to dollar-denominated emerging market debt.

“Investors are probably taking comfort in the prospect that Fed’s dovishness will weaken the dollar, which would make it easier for emerging-market companies that earn revenue in local currency to pay back their overseas debt. At the same time, the outlook for steady borrowing costs in the U.S. makes higher-yielding developing-nation debt more appealing,” according to Bloomberg.

EMB has a 30-day SEC yield of 5.37% and effective duration of 7.19 years. The fund’s three-year standard deviation is just under 8%.

About 85% of EMB’s 465 holdings are rated BBB, BB or B.

Increased demand this year for funds such as EMB “stems from the beaten-down nature of emerging markets after a particularly rough 2018, according to research from Bloomberg Intelligence that said this year’s flows probably ‘reflect bottom-feeding,’” according to Bloomberg.

For more fixed income investment solutions, visit the Fixed Income Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.