Like the air conditioning in a scorching Arizona summer, investors are turning up the dial when it comes to risky assets like emerging market (EM) bonds. This, of course, could feed into more capital allocated to EM-focused exchange-traded funds (ETFs).
The pandemic certainly put EM assets in a defeated state—currencies, equities, and bonds alike. However, the environment was rife for a perfect buying opportunity as a value play that could reap benefits once global economies began re-opening.
According to a Wall Street Journal report, countries like Zambia and Ecuador were hit hard by the pandemic, which raised their respective default rates on their government bonds. EM countries don’t have the discretionary cash or bond raising prowess that developed countries have in order to stave off the economic effects of the pandemic.
Still, amid the chaos, some investors saw an opportunity.
“The problem with markets is that they overreact, they end up pricing in far more defaults than we get,” Jan Dehn, head of research at Ashmore Group, which purchased who bought up emerging market government bonds during the height of the pandemic sell-off in March and April. “The real reason why these markets are reeling so much is because they shouldn’t have been sold in the first place.”
ETF Opportunities in EM
Despite the coronavirus putting emerging markets in a downtrodden state, there is still value to be had in EM assets via ETFs like the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM). GEM seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Goldman Sachs ActiveBeta® Emerging Markets Equity Index.
Investors who want broad exposure to EM can look at funds like the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO). VWO employs an indexing investment approach designed to track the performance of the FTSE Emerging Markets All Cap China A Inclusion Index. It invests by sampling the index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the index in terms of key characteristics.
Another fund to consider is the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). EEM seeks to track the investment results of the MSCI Emerging Markets Index. The fund generally invests at least 90% of its assets in the securities of its underlying index and in depositary receipts representing securities in its underlying index. The index is designed to measure equity market performance in the global emerging markets. The underlying index will include large- and mid-capitalization companies and may change over time.
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