Opportunity Beckons With EM 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 3.41% this year and some market observers believe opportunity remains with emerging markets debt.

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.

“Emerging market debt (EMD) has rallied sharply this year, bouncing back from a tough 2018,” said BlackRock in a recent note. “Is now a good time to add exposure? We would be buyers on any material sell-offs, as we see fundamentals remaining supportive in coming quarters. Our overall view on emerging markets (EMs) favors equities over debt, yet we believe EMD offers attractive income for bond portfolios.”

What’s Next

The rally in emerging market debt has pulled down yields significantly as bond prices increased, with the yield spreads between emerging market debt and U.S. investment-grade bonds tightening as a result. Nevertheless, the BlackRock strategists argued that emerging market debt yields remain attractive on an absolute and relative basis over the long-term.

Emerging market bonds still look attractive because the asset class took a double whammy last year after the Federal Reserve raised interest rates and the U.S. dollar appreciated against its global peers. The outlook for the asset class this year now looks very different, with the Federal Reserve hinting at easing up its interest rate hikes and the U.S. dollar now showing a weaker outlook.

“The growth story in EMs is also generally improving following weakness last year,” according to BlackRock. “We see policy easing underpinning a modest growth re-acceleration in China during the first half of 2019. More steady growth in EMs should help cushion slowing global growth. The risks to our view: An escalating U.S.-China trade conflict, a return of recession fears or an inflation resurgence sparking earlier-than-expected Fed tightening. U.S.-China trade negotiations look to be progressing, though frictions related to competition for global technology leadership are likely to persist. We have become less concerned about USD strength and see the Fed on hold until at least the second half.”

Rivals to EMB include the Invesco Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) and JPMorgan USD Emerging Markets Sovereign Bond ETF (NYSEArca: JPMB).

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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.