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.
For instance, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) has a 4.70% 30-day SEC yield and iShares Emerging Markets Local Currency Bond ETF (NYSEArca: LEMB) shows a 5.54% 30-day SEC yield.
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Despite concerns over the Fed, BlackRock pointed out that EM debt remained resilient in the wake of the June rate hike, and the overall rate environment remains benign.
The improving trade balances and capital positioning further supported emerging market countries, which made them less vulnerable to U.s. rate shocks than in previous periods.
Furthermore, potential investors should keep in mind the diversification qualities of emerging market bonds as EM debt provides benefits to traditional Treasuries exposure and even emerging market equities, which heavily lean toward China and other Asian emerging countries.
For more information on the fixed-income space, visit our bond ETFs category.