Look to EM Bond ETFs as an Attractive Yield Alternative

Under a low-yield environment with muted levels of volatility, investors should consider emerging market debt and bond-related exchange traded funds to bolster their fixed-income portfolios.

“Amid a low yielding, low volatility environment with a stable U.S. dollar, we believe emerging market debt offers competitive yields and may continue to do so,” BlackRock strategists said in a research note. “Furthermore, the credit quality of EM debt and potential diversification benefits give added appeal to the asset class.”

The EM debt category has been producing solid returns, with the J.P. Morgan EMB Core Index and the local debt JP Morgan GBI-EM Global Diversified returning 9.05% and 9.77%, respectively, over the past 12 months. ETF investors have also been open to diversify into this debt category as emerging market USD-denominated and local bond ETFs have attracted $11.8 billion in inflows this year.

Looking ahead, even if the Federal Reserve is embarking on a path to tighter monetary policy conditions, BlackRock argued long-term yields could remain capped in the foreseeable future due to structural factors, such as demand from systematic buyers like insurance companies.

Consequently, the ongoing search for yield may push investors income assets, especially alternative income sources like emerging market debt that still offer the potential for relatively attractive yields and enjoy sound fundamentals.