Yield-Starved Investors Can Look to Emerging Market Bonds

As economies around the world continue to recover from the coronavirus pandemic, investors may be more apt to take on riskier assets, including emerging markets. In addition to equities, bonds are another way for investors to get EM exposure, especially if they’re looking for higher-yielding assets.

IShares JPMorgan USD Emerging Markets Bond ETF (EMB) is a solid choice for low-cost exposure to U.S.-dollar-denominated emerging-markets government bonds,” wrote Neal Kosciulek in Morningstar. “The strategy earns a Morningstar Analyst Rating of Silver because it accurately represents the composition of the market and is one of the cheapest funds in the emerging-markets bond Morningstar Category.”

Before diving into EM bonds, investors must realize the risks, including higher volatility.

“Emerging-markets economies face a lot of idiosyncratic risks, and the bonds issued by their governments and agencies perform more like high-yield corporate issues than U.S. Treasuries,” Kosciulek noted. “They are more sensitive to credit risk and suffer more severe drawdowns. While, in theory, this should create an opportunity for actively managed funds to exploit mispricing, the JPMorgan EMBI Global Core Index (the category index), has not been any easy bogy to beat. Historically, investors interested in adding exposure to this area of the bond market would have done well to settle for an index fund. Over the 10 years through June 2020, there was only one fund in the category that outperformed the category index on a risk-adjusted basis.”

EM Options in Equities

Investors looking to get into EM equities can use the Goldman Sachs MarketBeta Emerging Markets Equity ETF (GSEE). GSEE seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Solactive GBS Emerging Markets Large & Mid Cap Index.

The fund invests at least 80% of its assets in securities included in its underlying index, in depositary receipts representing securities included in its underlying index and in underlying stocks in respect of depositary receipts included in its underlying index, which consists of equity securities of large and mid-capitalization issuers covering approximately the largest 85% of the free-float market capitalization in emerging markets.

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.

For more market trends, visit ETF Trends.