The Benefits of Emerging Markets Debt | ETF Trends

While the headlines for emerging markets (EM) weren’t great in 2022, things have picked up since last year. Local EM interest rates and currency markets have been quite compelling, thanks in part to high interest rates and decelerating inflation momentum. In fact, EM debt could offer attractive yields and diversification benefits in 2023.

“The asset class represents a large and growing proportion of the world economy,” said Payden & Rygel’s managing principal Kristin Ceva. She noted that EM debt accounts for roughly 60% of global GDP in 2022. “Emerging markets debt also offers attractive yields.”

See more: “When Allocating to High Yield, Choose Your Entry Points With Precision

EM sovereign yields were 8.6% as of May 31. Meanwhile, EM corporate yields were 7.5%, and local yields were 6.5%. And while there is significant dispersion, several countries offer local yields ranging from 8% to 12%.

Not as Risky as Their Reputation Suggests

Plus, EM debt isn’t nearly as risky as the headlines would make you believe. Around 60% of the sovereign dollar-pay index has been investment grade. And among EM corporate bonds and local currency bonds, that percentage is even higher — 67% and 75%, respectively.

“The largest emerging market sovereigns and corporates have also been resilient in the face of rising rates and tighter financial conditions,” Ceva added. “This is because central banks got ahead of inflation with proactive rate hikes, and corporate balance sheets have been well-managed.”

Tap Into These Benefits With XEMD

The BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF (XEMD) is designed to focus on short- to intermediate-term U.S. dollar-denominated EM bonds, excluding those with maturities exceeding 10 years. It tracks the J.P. Morgan EMBI Global Diversified Liquid 1-10 Year Maturity Index.

XEMD’s index mirrors the full index without significant deviations in terms of countries or sectors. Notably, it has a shorter duration compared to other broad market emerging market bond benchmarks, potentially offering relative performance advantages in a rising rate environment.

According to JoAnne Bianco, client portfolio manager at BondBloxx, “XEMD is crafted to provide fixed income investors with enhanced control over their duration exposure when venturing into emerging markets debt.”

BondBloxx has launched a total of 20 fixed income ETFs since February 2022. In addition to XEMD, the issuer offers seven industry sector-specific high-yield bond ETFs, three ratings-specific high-yield bond ETFs, eight target-duration U.S. Treasury ETFs, and an active high-yield bond sector rotation fund.

Formed in October 2021 with the aim of developing precise fixed income ETFs, BondBloxx now offers a diverse range of funds spanning U.S. Treasuries, high-yield bonds, and emerging market bonds. The issuer has demonstrated notable growth in a relatively short period, having recently surpassed $2 billion in assets.

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