It’s a Game of Hide-And-Go-Seek for Emerging Markets Bond Investors

2018 was a forgettable year for emerging markets (EM) investors—equity or bonds—as negative reactions to U.S.-China trade war news flooded the capital markets, causing EM-focused funds to incur the wrath of negative gains from fears of a global economic slowdown. 2019 saw EM bounce back, but 2020 could pose a game of hide-and-go-seek when it comes to bond investors in EM.

“Last year was a great one for emerging market debt,” wrote Craig Mellow in a Barron’s article. “The iShares USD J.P. Morgan Emerging Market Debt (NasdaqGM: EMB) exchange-traded fund returned 15.6%, as a dovish shift by the Federal Reserve allowed multiple rate cuts by big issuers such as Mexico, Russia, and Turkey. (Falling rates make already-issued bonds more valuable.)”

EMB seeks to track the investment results of the J.P. Morgan EMBI® Global Core Index composed of U.S. dollar-denominated, emerging market bonds. The index is a broad, diverse U.S. dollar-denominated emerging markets debt benchmark that tracks the total return of actively traded external debt instruments in emerging market countries.

The fund is up 15.18% within the past year based on Yahoo Finance performance numbers. The majority of market experts are forecasting more modest gains for equities in 2020 and as for bonds, seeking yield will be akin to finding a needle in the proverbial haystack.

“That performance will be tough to match in 2020 as the global easing cycle peters out,” Mellow added. “Average yield to term for the index underpinning the EM debt ETF (ticker: EMB) has contracted to a sober 4.4%, if you exclude the crisis polities of Argentina and Lebanon, says Cem Karacadag, an emerging markets debt manager at Barings.”

That is not to say, however, that searching for tangible yield in EM is impossible.

A High Yield EM Option

For investors seeking high-yielding income and emerging markets exposure, they can look to the VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM). HYEM seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.

HYEM is up 11.86% the past year according to Yahoo Finance performance figures.

Fund facts:

  • Focuses solely on the non-sovereign segment of the high yield emerging markets bond market
  • Currently lower average duration versus high yield U.S. corporate bonds
  • Lower historical default rates compared to high yield U.S. corporate bonds

For more market trends, visit ETF Trends.