In recent years, some yield-starved investors embraced emerging markets debt as a way of increasing income, sending the popularity of exchange traded funds such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ: EMB) soaring.
EMB tracks the J.P. Morgan EMBI Global Core Index, a market-cap-weighted index. Potential investors should note that since it is a cap-weighted index, countries with greater debt will have a larger position in the portfolio. EMB is now the world’s largest emerging markets bond fund, ETF or mutual fund.
“Ten years ago, the emerging-markets bond category consisted of 23 funds with total net assets of $7 billion. By the end of 2017, it grew to $60 billion of net assets and more than 90 strategies,” according to Morningstar. “Though not as liquid as fixed-income markets in the developed world, today there are sufficient participants and outstanding issuances to make the underlying market liquid enough to index at a reasonable cost.”
Among dollar-denominated emerging markets bonds ETFs, EMB’s primary rival is the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY).
As the global economy continues to expand, many will increase consumption of raw materials to fuel the expansions, which in turn would support most of the emerging markets that help supply the raw commodities, such as oil and metals.
When comparing global central bank monetary policies, most developed countries have heavily relied on quantitative easing and low interest rates to bolster their economies, with some, notably the U.S. and the United Kingdom, already eyeing tighter monetary policies to obviate a potentially overheating economy. Meanwhile, many emerging market central banks have more room to run with their easing policies, which may continue to support their local debt securities.
EMB is a cap-weighted fund while PCY uses an equal-weight methodology.
“As of the end of 2017, EMB and PCY had trailing five-year annualized returns of 3.60% and 3.69%, respectively,” said Morningstar. “These numbers put both of them squarely in the middle of their category. Their Sharpe ratios for the same period were on par with the category average. Given their middling absolute and risk-adjusted performance, we have assigned both funds Neutral Performance Pillar ratings as of our most recent review.”
EMB charges 0.4% per year while PCY charges 0.5%, but both are among the least expensive emerging markets bond funds on the market.
For more information on the developing economies, visit our emerging markets category.