At this juncture in 2020, it’s fair to say a broad swath of investors that yields on domestic government bonds just aren’t cutting it for income investors because the Federal Reserve took interest rates to historic lows.
Emerging markets bonds, an asset class accessible via an array of exchange traded funds, offer investors higher yields than what they earn on Treasuries and other developed markets debt. The VanEck Vectors Emerging Markets Aggregate Bond ETF (EMAG) is one avenue for accessing emerging markets debt.
EMAG seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of MVIS® EM Aggregate Bond Index (the “EM Aggregate Bond Index”). The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index is comprised of emerging market sovereign bonds and corporate bonds denominated in U.S. dollars, Euros or local emerging market currencies. The index includes both investment grade and below investment grade rated securities.
“Once investors decide to buy emerging market debt, no matter which vehicle they use, they need to make another key call: how to bet on the dollar. Since March, the Federal Reserve’s interest-rate easing has led the dollar to depreciate against foreign currencies, giving a boost to returns of markets in local emerging market currencies,” reports Alexandra Scaggs for Barron’s.
Emerging Markets Ideas
In recent years, some yield-starved investors embraced emerging markets debt as a way of increasing income. 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.
“But the dollar’s depreciation might not continue if fiscal stimulus doesn’t get passed before the election. And a coronavirus-case resurgence could slow global growth during flu season and cause a flight to safety and the dollar,” according to Barron’s. “Investors who want to hang on to dollar exposure and keep expenses low might want to consider emerging market dollar-denominated debt ETFs.”
An option to consider in the EM high-yield bond market is 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.
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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.