Interest rates are low throughout the developed world, adding to the allure of higher-yielding emerging markets debt and ETFs, such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB).
EMB, the largest emerging markets bond fund, is higher by nearly 9% this year. 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.
“EM debt looks attractive – with a 30 day SEC yield of 4.4% and offers a complementary geographical exposure to the Asia heavy EM equity indexes,” said BlackRock in a recent note.
For its part, EMB has a 30-day SEC yield of 5.43%. EMB offers investors exposure to U.S. dollar-denominated government bonds issued by emerging market countries. The fund provides access to the sovereign debt of more than 30 emerging market countries in a single fund and gives investors the chance to seek a higher yield and customize their emerging markets allocations.
A stabilizing dollar outlook also diminishes the danger of taking on emerging currency exposure, which has historically acted as a large source of volatility for investors investing in local-currency-denominated emerging market debt.
“So far in 2019, more than thirty central banks have cut rates, with the Fed and the European Central Bank messaging that further accommodation might be needed,” said BlackRock. “In a global rate-cutting environment, investors may be able to benefit by looking to EM debt for a yield alternative.”
While a Fed rate cut helps, some emerging markets central banks are expected to lower rates, too. Brazil, Chile, Mexico, India, and Thailand are among the developing economies that have recently trimmed borrowing costs.
“Whether EMs come back in favor this week or next year, we believe most investors should consider some allocation over the long term to this important asset class. And ETFs can offer the flexibility to implement that allocation through a range of applications,” according to BlackRock.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.